Twinsectra Limited v Yardley and Others

Case •

[2002] UKHL 12

No judgment structure available for this case.
  1. My noble and learned friend Lord Hoffmann has referred to the facts relevant to the issues which arise on this appeal and I gratefully adopt them.

  2. The first main issue is whether the monies received by Sims and Roper were held in trust. The judge found that they were not; the Court of Appeal held that they were. For the reasons given by Lord Hoffmann I agree firmly with the Court of Appeal.

  3. The second issue I have found more difficult. The judge found that Mr Leach had shut his eyes to the problems or the implications of what happened, yet he acquitted him of dishonesty. The Court of Appeal in a careful analysis by Potter LJ concluded that deliberately shutting his eyes in this way was dishonesty within the valuable analysis by Lord Nicholls of Birkenhead in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.

  4. There are conflicting arguments. Prima facie shutting one's eyes to problems or implications and not following them up may well indicate dishonesty; on the other hand prima facie it needs a strong case to justify the Court of Appeal reversing the finding as to dishonesty of the trial judge who has heard the witness and gone in detail into all the facts.

  5. The real difficulty it seems to me is whether in view of these two conflicting arguments the case should go for a retrial with all the disadvantages that entails or whether one of the arguments was sufficiently strong for your Lordships to accept it and to conclude the question. In the end I am not satisfied that the Court of Appeal were entitled to substitute their assessment for that of the trial judge. Despite my doubts as to the implications to be drawn on a finding of "shutting one's eyes" it seems to me clear that the judge was very conscious of Lord Nicholls' analysis and I do not think he can possibly have left out of account the question whether Mr Leach knew or realised that what he was doing fell below the required standards when he deliberately shut his eyes eg to the implications of the undertaking given by Mr Sims. Mr Leach may have been naïve or misguided but I accept that the judge after hearing lengthy evidence from Mr Leach was entitled to conclude that he had not been dishonest.

  6. Accordingly it would be wrong to send the matter for retrial and for these brief reasons and the reasons given by Lord Hutton I would allow the appeal.

    LORD STEYN

    My Lords,

  7. I agree that the law is as stated in the judgments of my noble and learned friends Lord Hoffmann and Lord Hutton. In particular I agree with their interpretation of the decision in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. In other words, I agree that a finding of accessory liability against Mr Leach was only permissible if, applying what Lord Hutton has called the combined test, it were established on the evidence that Mr Leach had been dishonest.

  8. After a trial Carnwath J was not satisfied that Mr Leach had been dishonest. I agree with Lord Hutton's reasons for concluding that the Court of Appeal was not entitled to reverse the judge on the central issue of dishonesty. I too would allow the appeal.

    LORD HOFFMANN

    My Lords,

  9. Paul Leach is a solicitor practising in Godalming under the name Paul Leach & Co. Towards the end of 1992 he acted for a Mr Yardley in a transaction which included the negotiation of a loan of £1m from Twinsectra Limited. Mr Leach did not deal directly with Twinsectra. Another firm of solicitors, Sims and Roper of Dorset ("Sims"), represented themselves as acting on behalf of Mr Yardley. They received the money in return for the following undertaking:

      "1.  The loan monies will be retained by us until such time as they are applied in the acquisition of property on behalf of our client.

      2.  The loan monies will be utilised solely for the acquisition of property on behalf of our client and for no other purposes.

      3.   We will repay to you the said sum of £1,000,000 together with interest calculated at the rate of £657.53 such payment to be made within four calendar months after receipt of the loan monies by us."

  10. Contrary to the terms of the undertaking, Sims did not retain the money until it was applied in the acquisition of property by Mr Yardley. On being given an assurance by Mr Yardley that it would be so applied, they paid it to Mr Leach. He in turn did not take steps to ensure that it was utilised solely for the acquisition of property on behalf of Mr Yardley. He simply paid it out upon Mr Yardley's instructions. The result was that £357.720.11 was used by Mr Yardley for purposes other than the acquisition of property.

  11. The loan was not repaid. Twinsectra sued all the parties involved including Mr Leach. The claim against him was for the £357,720.11 which had not been used to buy property. The basis of the claim was that the payment by Sims to Mr Leach in breach of the undertaking was a breach of trust and that he was liable for dishonestly assisting in that breach of trust in accordance with the principles stated by Lord Nicholls of Birkenhead in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.

  12. The trial judge (Carnwath J) did not accept that the monies were "subject to any form of trust in Sims and Roper's hands". I do not imagine that the judge could have meant this to be taken literally. Money in a solicitor's client account is held on trust. The only question is the terms of that trust. I should think that what Carnwath J meant was that Sims held the money on trust for Mr Yardley absolutely. That is the way it was put by Mr Oliver QC, who appeared for Mr Leach. But, like the Court of Appeal, I must respectfully disagree. The terms of the trust upon which Sims held the money must be found in the undertaking which they gave to Twinsectra as a condition of payment. Clauses 1 and 2 of that undertaking made it clear that the money was not to be at the free disposal of Mr Yardley. Sims were not to part with the money to Mr Yardley or anyone else except for the purpose of enabling him to acquire property.

  13. In my opinion the effect of the undertaking was to provide that the money in the Sims client account should remain Twinsectra's money until such time as it was applied for the acquisition of property in accordance with the undertaking. For example, if Mr Yardley went bankrupt before the money had been so applied, it would not have formed part of his estate, as it would have done if Sims had held it in trust for him absolutely. The undertaking would have ensured that Twinsectra could get it back. It follows that Sims held the money in trust for Twinsectra, but subject to a power to apply it by way of loan to Mr Yardley in accordance with the undertaking. No doubt Sims also owed fiduciary obligations to Mr Yardley in respect of the exercise of the power, but we need not concern ourselves with those obligations because in fact the money was applied wholly for Mr Yardley's benefit.

  14. The judge gave two reasons for rejecting a trust. The first was that the terms of the undertaking were too vague. It did not specify any particular property for which the money was to be used. The second was that Mr Ackerman, the moving spirit behind Twinsectra, did not intend to create a trust. He set no store by clauses 1 and 2 of the undertaking and was content to rely on the guarantee in clause 3 as Twinsectra's security for repayment.

  15. I agree that the terms of the undertaking are very unusual. Solicitors acting for both lender and borrower (for example, a building society and a house buyer) commonly give an undertaking to the lender that they will not part with the money save in exchange for a duly executed charge over the property which the money is being used to purchase. The undertaking protects the lender against finding himself unsecured. But Twinsectra was not asking for any security over the property. Its security was clause 3 of the Sims undertaking. So the purpose of the undertaking was unclear. There was nothing to prevent Mr Yardley, having acquired a property in accordance with the undertaking, from mortgaging it to the hilt and spending the proceeds on something else. So it is hard to see why it should have mattered to Twinsectra whether the immediate use of the money was to acquire property. The judge thought it might have been intended to give some protective colour to a claim against the Solicitors Indemnity Fund if Sims failed to repay the loan in accordance with the undertaking. A claim against the fund would depend upon showing that the undertaking was given in the context of an underlying transaction within the usual business of a solicitor: United Bank of Kuwait Ltd v Hammoud [1988] 1 WLR 1051. Nothing is more usual than for solicitors to act on behalf of clients in the acquisition of property. On the other hand, an undertaking to repay a straightforward unsecured loan might be more problematic.

  16. However, the fact that the undertaking was unusual does not mean that it was void for uncertainty. The charge of uncertainty is levelled against the terms of the power to apply the funds. "The acquisition of property" was said to be too vague. But a power is sufficiently certain to be valid if the court can say that a given application of the money does or does not fall within its terms: see In re Baden's Deed Trusts [1971] AC 424. And there is no dispute that the £357,720.11 was not applied for the acquisition of property.

  17. As for Mr Ackerman's understanding of the matter, that seem to me irrelevant. Whether a trust was created and what were its terms must depend upon the construction of the undertaking. Clauses 1 and 2 cannot be ignored just because Mr Ackerman was not particularly interested in them.

  18. The other question is whether Mr Leach, in receiving the money and paying it to Mr Yardley without concerning himself about its application, could be said to have acted dishonestly. The judge found that in so doing he was "misguided" but not dishonest. He had "shut his eyes" to some of the problems but thought he held the money to the order of Mr Yardley without restriction. The Court of Appeal reversed this finding and held that he had been dishonest.

  19. My noble and learned friend Lord Millett considers that the Court of Appeal was justified in taking this view because liability as an accessory to a breach of trust does not depend upon dishonesty in the normal sense of that expression. It is sufficient that the defendant knew all the facts which made it wrongful for him to participate in the way in which he did. In this case, Mr Leach knew the terms of the undertaking. He therefore knew all the facts which made it wrongful for him to deal with the money to the order of Mr Yardley without satisfying himself that it was for the acquisition of property.

  20. I do not think that it is fairly open to your Lordships to take this view of the law without departing from the principles laid down by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. For the reasons given by my noble and learned friend Lord Hutton, I consider that those principles require 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. I also agree with Lord Hutton that the judge correctly applied this test and that the Court of Appeal was not entitled, on the basis of the written transcript, to make a finding of dishonesty which the judge who saw and heard Mr Leach did not.

  21. The ground upon which the Court of Appeal reversed the judge's finding was that he had misdirected himself in law. His finding about Mr Leach shutting his eyes to problems meant that he did not appreciate that a person may be dishonest without actually knowing all the facts if he suspects that he is about to do something wrongful and deliberately shuts his eyes to avoid finding out. As Lord Nicholls said in the Royal Brunei case, at p 389, an honest person does not:

      "deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless."

    So the Court of Appeal said that, when the judge said that Mr Leach was not dishonest, he meant that he was not "consciously dishonest". But the finding about shutting his eyes meant that in law he had nevertheless been dishonest.

  22. I do not believe that the judge fell into such an elementary error. He had himself quoted the passage I have cited from the opinion of Lord Nicholls in the Royal Brunei case a little earlier in his judgment. He could not possibly have overlooked the principle. That said, I do respectfully think it was unfortunate that the judge three times used the expression "shut his eyes" to "the details", or "the problems", or "the implications". The expression produces in judges a reflex image of Admiral Nelson at Copenhagen and the common use of this image by lawyers to signify a deliberate abstinence from inquiry in order to avoid certain knowledge of what one suspects to be the case: see Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] 2 WLR 170, 179, per Lord Hobhouse of Woodborough, and Lord Scott of Foscote, at pp 207-210. But, as my noble and learned friend Lord Millett points out, there were in this case no relevant facts of which Mr Leach was unaware. What I think the judge meant was that he took a blinkered approach to his professional duties as a solicitor, or buried his head in the sand (to invoke two different animal images). But neither of those would be dishonest.

  23. Mr Leach believed that the money was at the disposal of Mr Yardley. He thought that whether Mr Yardley's use of the money would be contrary to the assurance he had given Mr Sims or put Mr Sims in breach of his undertaking was a matter between those two gentlemen. Such a state of mind may have been wrong. It may have been, as the judge said, misguided. But if he honestly believed, as the judge found, that the money was at Mr Yardley's disposal, he was not dishonest.

  24. I do not suggest that one cannot be dishonest without a full appreciation of the legal analysis of the transaction. A person may dishonestly assist in the commission of a breach of trust without any idea of what a trust means. The necessary dishonest state of mind may be found to exist simply on the fact that he knew perfectly well that he was helping to pay away money to which the recipient was not entitled. But that was not the case here. I would therefore allow the appeal and restore the decision of Carnwath J

    LORD HUTTON

    My Lords,

  25. I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Hoffmann and Lord Millett. For the reasons which they give I agree that the undertaking given by Mr Sims to Twinsectra Ltd ("Twinsectra") created a trust, and I turn to consider whether the Court of Appeal was right to hold that Mr Leach is liable for assisting in Mr Sims' breach of trust. Carnwath J held that the undertaking did not create a trust, but he also held that Mr Leach had not been dishonest. The Court of Appeal reversed his findings and held that the undertaking gave rise to a trust and that Mr Leach had acted dishonestly and was liable as an accessory to Mr Sims' breach of trust.

  26. My Lords, in my opinion, the issue whether the Court of Appeal was right to hold that Mr Leach had acted dishonestly depends on the meaning to be given to that term in the judgment of Lord Nicholls of Birkenhead in Royal Brunei Airlines Snd Bhd v Tan [1995] 2 AC 378. In approaching this question it will be helpful to consider the place of dishonesty in the pattern of that judgment. Lord Nicholls considered, at pp 384 and 385, the position of the honest trustee and the dishonest third party and stated that dishonesty on the part of the third party was a sufficient basis for his liability notwithstanding that the trustee, although mistaken and in breach of trust, was honest. He then turned to consider the basis on which the third party, who does not receive trust property but who assists the trustee to commit a breach, should be held liable. He rejected the possibility that such a third party should never be liable and he also rejected the possibility that the liability of a third party should be strict so that he would be liable even if he did not know or had no reason to suspect that he was dealing with a trustee. Therefore Lord Nicholls concluded that the liability of the accessory must be fault-based and in identifying the touchstone of liability he stated, at p 387 H: "By common accord dishonesty fulfils this role." Then, at pp 388 and 389, he cited a number of authorities and the views of commentators and observed that the tide of authority in England had flowed strongly in favour of the test of dishonesty and that most, but not all, commentators also preferred that test.

  27. Whilst in discussing the term "dishonesty" the courts often draw a distinction between subjective dishonesty and objective dishonesty, there are three possible standards which can be applied to determine whether a person has acted dishonestly. There is a purely subjective standard, whereby a person is only regarded as dishonest if he transgresses his own standard of honesty, even if that standard is contrary to that of reasonable and honest people. This has been termed the "Robin Hood test" and has been rejected by the courts. As Sir Christopher Slade stated in Walker v Stones [2000] Lloyds Rep PN 864, 877 para 164:

      "A person may in some cases act dishonestly, according to the ordinary use of language, even though he genuinely believes that his action is morally justified. The penniless thief, for example, who picks the pocket of the multi-millionaire is dishonest even though he genuinely considers that theft is morally justified as a fair redistribution of wealth and that he is not therefore being dishonest."

    Secondly, there is a purely objective standard whereby a person acts dishonestly if his conduct is dishonest by the ordinary standards of reasonable and honest people, even if he does not realise this. Thirdly, there is a standard which combines an objective test and a subjective test, and which requires that before there can be a finding of dishonesty it must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest. I will term this "the combined test".

  28. There is a passage in the earlier part of the judgment in Royal Brunei which suggests that Lord Nicholls considered that dishonesty has a subjective element.

        Thus in discussing the honest trustee and the dishonest third party at [1995] 2 AC 378, 385 A-C he stated:

      "These examples suggest that what matters is the state of mind of the third party …. But [the trustee's] state of mind is essentially irrelevant to the question whether the third party should be made liable to the beneficiaries for breach of trust."

  29. However, after stating, at p 387 H, that the touchstone of liability is dishonesty, Lord Nicholls went on at page 389 B-C to discuss the meaning of dishonesty:

      "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] 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."

  30. My noble and learned friend Lord Millett has subjected this passage and subsequent passages in the judgment to detailed analysis and is of the opinion that Lord Nicholls used the term "dishonesty" in a purely objective sense so that in this area of the law a person can be held to be dishonest even though he does not realise that what he is doing is dishonest by the ordinary standards of honest people. This leads Lord Millett on to the conclusion that in determining the liability of an accessory dishonesty is not necessary and that liability depends on knowledge.

  31. In R v Ghosh [1982] QB 1053 Lord Lane CJ held that in the law of theft dishonesty required that the defendant himself must have realised that what he was doing was dishonest by the ordinary standards of reasonable and honest people. The three sentences in Lord Nicholl's judgment, at p 389 B-C, which appear to draw a distinction between the position in criminal law and the position in equity, do give support to Lord Millett's view. But considering those sentences in the context of the remainder of the paragraph and taking account of other passages in the judgment, I think that in referring to an objective standard Lord Nicholls was contrasting it with the purely subjective standard whereby a man sets his own standard of honesty and does not regard as dishonest what upright and responsible people would regard as dishonest. Thus after stating that dishonesty is assessed on an objective standard he continued, at p 389 C:

      "At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. 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."

    Further, at p 391 A-C, Lord Nicholls said:

      "Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.

      Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did."

  32. The use of the word "knowing" in the first sentence would be superfluous if the defendant did not have to be aware that what he was doing would offend the normally accepted standards of honest conduct, and the need to look at the experience and intelligence of the defendant would also appear superfluous if all that was required was a purely objective standard of dishonesty. Therefore I do not think that Lord Nicholls was stating that in this sphere of equity a man can be dishonest even if he does not know that what he is doing would be regarded as dishonest by honest people.

  33. Then, at p 392 F-G, Lord Nicholls stated the general principle that dishonesty is a necessary ingredient of accessory liability and that knowledge is not an appropriate test:

      "The accessory liability principle

      Drawing the threads together, their Lordships' overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. 'Knowingly' is better avoided as a defining ingredient of the principle, and in the context of this principle the Baden [1993] 1 WLR 509 scale of knowledge is best forgotten."

    I consider that this was a statement of general principle and was not confined to the doubtful case when the propriety of the transaction in question was uncertain.

  34. At p 387 B-C, Lord Nicholls stated that there is a close analogy between "knowingly" interfering with the due performance of a contract and interfering with the relationship between a trustee and a beneficiary. But this observation was made in considering and rejecting the possibility that a third party who did not receive trust property should never be liable for assisting in a breach of trust. I do not think that in referring to "knowingly" procuring a breach of contract Lord Nicholls was suggesting that knowingly assisting in a breach of trust was sufficient to give rise to liability. Such a view would be contrary to the later passage, at p 392 F-G, dealing directly with this point.

  35. There is, in my opinion, a further consideration which supports the view that for liability as an accessory to arise the defendant must himself appreciate that what he was doing was dishonest by the standards of honest and reasonable men. A finding by a judge that a defendant has been dishonest is a grave finding, and it is particularly grave against a professional man, such as a solicitor. Notwithstanding that the issue arises in equity law and not in a criminal context, I think that it would be less than just for the law to permit a finding that a defendant had been "dishonest" in assisting in a breach of trust where he knew of the facts which created the trust and its breach but had not been aware that what he was doing would be regarded by honest men as being dishonest.

  36. It would be open to your Lordships to depart from the principle stated by Lord Nicholls that dishonesty is a necessary ingredient of accessory liability and to hold that knowledge is a sufficient ingredient. But the statement of that principle by Lord Nicholls has been widely regarded as clarifying this area of the law and, as he observed, the tide of authority in England has flowed strongly in favour of the test of dishonesty. Therefore I consider that the courts should continue to apply that test and that your Lordships should state that dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct.

  37. In cases subsequent to Royal Brunei there has been some further consideration of the test to be applied to determine dishonesty (the cases being helpfully discussed in an article by Mr Andrew Stafford QC on "Solicitors' liability for knowing receipt and dishonest assistance in breach of trust" in (2001) 17 Professional Negligence 3. For the reasons which I have given I consider that in Abbey National PLC v Solicitors Indemnity Fund Ltd [1997] PNLR 306 Steel J applied the correct test. In that case, at p 310, she referred to the test set out in R v Ghosh [1982] QB 1053 and to Lord Nicholl's judgment in Royal Brunei [1995] 2 AC 378 and observed that it was to the effect that honesty is to be judged objectively, and she continued:

      "What in this case, did, Mr Fallon do, and was he acting as a reasonable and honest solicitor would do? In that case it was laid down that individuals are not free to set their own standards. Mr Fenwick on behalf of the defendant says that if I find that by those standards Mr Fallon was dishonest that would be enough. I need to consider what he did and ask the question: Was he acting as an honest person should? Was what he did dishonest by the standards of a reasonable and honest man or a reasonable and honest solicitor? Having read that case, however, it seems to me that the judgment does not set down a wholly objective test for civil cases. Lord Nicholls particularly refers to a conscious impropriety. The test there, it seems, does embrace a subjective approach, and I have to look at the circumstances to see whether they were such that Mr Fallon must have known that what he did was by the standards of ordinary decent people dishonest. I accept totally that individuals should not be free to set their own standards, but there is in my view a subjective element both in civil and in criminal cases."

  38. Therefore I turn to consider the judgment of Carnwath J and the Court of Appeal on the basis that a finding of accessory liability can only be made against Mr Leach if, applying the combined test, it were established on the evidence that he was dishonest.

  39. At the trial Mr Leach was cross-examined very closely and at length about his state of mind when he paid to Mr Yardley the monies transferred to him by Mr Sims. The tenor of his replies was that he paid the monies to his client because his client instructed him to do so. Thus in the course of that cross-examination counsel for Twinsectra put the following questions to him (page 55 of the transcript):

      "Q.  That is not what you said in your pleading which is what I am putting to you. In your pleading you said that with the exception of the Glibbery payment every other payment was made by you in the belief that the money was going to be used for the acquisition of property by companies of Mr Yardley.

      A.  I had no reason to disbelieve that it was not. As I said, I believed my client. He borrowed the money. I followed his instructions.

      Q.  £200,000 was being transferred to Y C Sales, you did not believe for a moment that that company was going to use it to acquire property, did you?

      A.  My Lord, I merely followed my client's instructions.

      CARNWATH J: I think there is a difference. I mean I understand you are saying that, but there is a difference between saying: "I simply paid it in accordance with my client's instructions", and saying, as is said in the pleading: "I paid it in the belief it was going to be used on the acquisition of property". Now, if your evidence that the former was true and the latter was not then fair enough, but I think Mr Tager is entitled to ask you whether it is right positively to state that you paid the monies in the belief that they were being applied in the acquisition of property.

      A.  I merely believed in the sense that the monies my client had borrowed were being used for the purpose for which he borrowed them. I actually didn't consider the point.

      Q.  No, so it is probably that pleading goes rather farther than your own recollection?

      A.  Yes, I think it is probably ….

      MR TAGER: You were putting forward a case in your pleading that Mr Sims had confirmed with you on 23 December that it was going to be used for property. You asked your client if that was so and you got him to confirm the details. The money comes in, you pay it out and you believe each time that that is how the money was used.

      A.  I had no reason to disbelieve my client.

      CARNWATH J: I think I am clear what the witness is saying, Mr Tager."

  40. Carnwath J stated, at pp 50, 51 and 52 of his judgment:

      "I do not find Mr Leach to have been dishonest, but he was certainly misguided. He found himself in a difficult position. His retainer for Mr Yardley on the Apperley Bridge transaction was very important to his practice (at a time when large conveyancing jobs were few), and offered the prospect of similar work in the future. When asked to review the documentation on the Nigerian venture, he was understandably reluctant to prejudice his relationship with his client.

      I do not accept his evidence that he paid no regard to the details. He was specifically asked to review the terms. He must have realised that it was a very unusual venture, and that the returns of the kind offered were very unlikely to be associated with a wholly legitimate business transaction. ….

      His attitude to the Twinsectra loan was not dissimilar. When asked to give the undertaking himself, he regarded it as a very unusual request, and one outside the normal course of a solicitor's practice. This did not lead him to advise Mr Yardley against it, but rather to distance himself from any responsibility for its terms. He told Mr Sims that they were a matter for him. This unease ought to have put him on notice of the need for caution when dealing with the money received under the undertakings. He was clearly aware of their terms. Indeed, his pleaded defence asserts (paragraph 25(4)) that he believed their 'substance … to be that the advance would be applied in the acquisition of property' and that he had received them on the footing that they would be so applied. Yet, in evidence, he frankly admitted that he had regarded the money as held simply to the order of Mr Yardley, without restriction. Again, I have to conclude that he simply shut his eyes to the problems. As far as he was concerned, it was a matter solely for Mr Sims to satisfy himself whether he could release the money to Mr Yardley's account."

    Later in the judgment after holding that the undertaking given by Mr Sims did not create a trust the judge stated, at p 73:

      "Were any of the defendants knowing recipients or accessories?

      The above conclusion makes it unnecessary to resolve the more difficult question whether any of the defendants (that is, the Yardley companies, or Mr Leach) had the necessary state of mind to make them liable under these headings. For these purposes the companies must realistically be taken to have had the same knowledge and state of mind as Mr Yardley. I have already given my views as to the extent to which I regard him as having acted dishonestly. In Mr Leach's case, I have found that he was not dishonest, but that he did deliberately shut his eyes to the implications of the undertaking. Whether in either case this would be sufficient to establish accessory liability depends on the application of the Royal Brunei principles to those facts. Although that case was concerned with "knowing assistance" rather than "knowing receipt", I would find it very difficult, in the light of the current state of the authorities to which I have referred, to define the difference in the mental states required; and I doubt if there is one."

  41. It would have been open to the judge to hold that Mr Leach was dishonest, in that he knew that he was transferring to Mr Yardley or to one of his companies monies which were subject to an undertaking that they would be applied solely for the acquisition of property and that the monies would not be so applied. But the experienced judge who was observing Mr Leach being cross-examined at length found that Mr Leach, although misguided, was not dishonest in carrying out his client's instructions.

  42. The judge did not give reasons for this finding or state what test he applied to determine dishonesty, but I think it probable that he applied the combined test and I infer that he considered that Mr Leach did not realise that in acting on his client's instructions in relation to the monies he was acting in a way which a responsible and honest solicitor would regard as dishonest. The judge may also have been influenced by the consideration that as he did not find that Mr Sims' undertaking created a trust Mr Leach would not have realised that he was dealing with trust property.

  43. It is only in exceptional circumstances that an appellate court should reverse a finding by a trial judge on a question of fact (and particularly on the state of mind of a party) when the judge has had the advantage of seeing the party giving evidence in the witness box. Therefore I do not think that it would have been right for the Court of Appeal in this case to have come to a different conclusion from the judge and to have held that Mr Leach was dishonest in that when he transferred the monies to Mr Yardley he knew that his conduct was dishonest by the standards of responsible and honest solicitors.

  44. This was the view taken by the Court of Appeal in Mortgage Express Ltd v Newman & Co [2000] Lloyds Rep PN 745 where the issue before the court was not dissimilar to the issue in the present case. In that case it was alleged that the defendant, a solicitor, had dishonestly taken part in a mortgage fraud. In the High Court [2000] PNLR 298 the judge found that the defendant had not consciously suspected a mortgage fraud. Nevertheless he found that she had deliberately refrained from making enquiries and giving advice which an ordinary honest and competent solicitor would have made and given in all the circumstances, and that she had no excuse for doing so other than the fact that she had taken a highly restricted and blinkered view of the duties that she owed to her clients. The judge considered that the explanation for this behaviour was to be found in what she had been told by an insurance and mortgage broker, Mr Baruch, at the outset of the whole transaction, which was that a particular client was not the kind of client who required to be advised of the matters of which a purchaser would normally be advised. The judge found that the solicitor had not been dishonest. He said, at pp 321 and 322:

      "Her fault thus lay in her grossly defective appreciation of the nature of the duties she owed to Mortgage Express and a determination at the outset not to concern herself with any matters which were not strictly within the tunnel of her vision. If she honestly believed that it was proper for her to take such a restricted view of her duties, and did not in fact come to suspect that a mortgage fraud was being committed, then in my judgment, however gross the negligence she was not guilty of a dishonest or fraudulent omission within the meaning of rule 14(f). I have concluded that, unreasonable as it was for her to hold it, the view that she held of the very restricted ambit of her duties to Mortgage Express was honestly held ….

      My conclusion is that her whole approach to this problem was from the outset both naïve and well below the standards which should be expected of her profession, but was not dishonest."

  45. The Court of Appeal held that the judge's finding that the defendant's conduct was explained by instructions given to her by Mr Baruch was not one which he could have come to on the pleadings and the evidence and that therefore his judgment must be set aside. The plaintiff had submitted that in the absence of a conclusion as to the Baruch instructions, it was clear that the judge would have held that the defendant had been dishonest. Therefore the plaintiff submitted that the Court of Appeal should so hold. The Court of Appeal acknowledged the logic of this submission but observed that it did not take into account the important fact that the judge had concluded that the defendant had not been dishonest after having seen her cross-examined over one and a half days, and Aldous LJ (with whose judgment Tuckey and Mance LLJ agreed) stated, at p 752, para 38:

      "It would not be right for this court to conclude that Ms Newman was dishonest when the judge had concluded to the contrary, albeit upon a basis which I have held to be flawed. A conclusion as to whether Ms Newman acted honestly can only be reached after seeing Ms Newman give her evidence."

  46. However, in the present case, the Court of Appeal considered that it was entitled to differ from the judge and to find that Mr Leach had been dishonest on the ground that the judge had deliberately refrained from considering a particular aspect of the case, namely "Nelsonian" dishonesty. In his judgment, at p 68, Carnwath J cited the following passage from the judgment of Lord Nicholls in Royal Brunei [1995] 2 AC 378, 389:

      "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. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless."

    Later in his judgment at page 73 after holding that the undertaking did not create a trust the judge continued with the passage which I have already set out under the heading:

      "Were any of the defendants knowing recipients or accessories?"

  47. Delivering the judgment of the Court of Appeal and after referring to the passage in the judgment of Carnwath J, at p 68 citing Lord Nicholls, Potter LJ stated [1999] Lloyd's Rep Bank 438, 462 para 102:

      "Bearing in mind the inclusion within Lord Nicholl's definition of dishonesty of the position where a party deliberately closes his eyes and ears, it can only be assumed that at that point, when the judge referred to Mr Leach as 'not dishonest', he was referring to the state of conscious, as opposed to 'Nelsonian', dishonesty, and it is plain that he deliberately refrained from resolving the latter question on the basis that it was unnecessary to do so.

      103. Had the judge undertaken that task, Mr Tager submits that he could only have been driven to one conclusion, namely that Nelsonian dishonesty was established."

  48. At the conclusion of a detailed and careful consideration of the submissions advanced by the respective counsel Potter LJ concluded the portion of the judgment relating to Mr Leach by stating, at p 465, para 109,:

      "It seems to me that, save perhaps in the most exceptional circumstances, it is not the action of an honest solicitor knowingly to assist or encourage another solicitor in a deliberate breach of his undertaking. At the very least it seems to me that Mr Leach's conduct amounted, in the words of Lord Nicholls to 'acting in reckless disregard of others' rights or possible rights [which] can be a tell-tale sign of dishonesty'.

      110. I do not consider that the points taken by Mr Jackson are sufficient to negative that tell-tale sign in this case. I have already dealt with his submissions (1) and (3). So far as his submission (2) is concerned, for reasons already given it does not seem to me that the fact that Mr Leach was acting for Mr Yardley can of itself excuse the former's refusal to consider the rights or possible rights of Twinsectra which came to his notice. Nor do I consider that the question whether Mr Leach acted dishonestly in the Nelsonian sense depends on whether he appreciated that what was anticipated was a 'mere' breach of undertaking or that it constituted a breach of trust. In such a case the vice seems to me to rest in deliberately closing his eyes to the rights of Twinsectra, whether legal or equitable, as the beneficiary of the undertaking, and his deliberate failure to follow matters up or take advice for fear of embarrassment or disadvantage."

  49. I agree with Lord Hoffmann that it is unfortunate that Carnwath J referred to Mr Leach deliberately shutting his eyes to the problems and to the implications of the undertaking, but like Lord Hoffmann I do not think it probable that having cited the passage from the judgment of Lord Nicholls at [1995] 2 AC 378, 389 F the judge then overlooked the issue of Nelsonian dishonesty in finding that Mr Leach was not dishonest. I also consider, as Lord Millett has observed, that this was not a case where Mr Leach deliberately closed his eyes and ears, or deliberately did not ask questions, lest he learned something he would rather not know - he already knew all the facts, but the judge concluded that nevertheless he had not been dishonest. I also think that Potter LJ applied too strict a test when he stated at page 465:

      "It seems to me that, save perhaps in the most exceptional circumstances, it is not the action of an honest solicitor knowingly to assist or encourage another solicitor in a deliberate breach of his undertaking."

    This test does not address the vital point whether Mr Leach realised that his action was dishonest by the standards of responsible and honest solicitors. In the light of the judge's finding, based as it clearly was, on an assessment of Mr Leach's evidence in cross-examination in the witness box before him, I consider the Court of Appeal should not have substituted its own finding of dishonesty.

  50. As I have stated, Carnwath J did not give reasons for his finding that Mr Leach was not dishonest and did not state the test which he applied to determine dishonesty. Therefore the question arises whether a new trial should be ordered. An argument of some force can be advanced that there should be a retrial, and in Mortgage Express Ltd v Newman & Co [2000] Lloyd's Rep PN 745 the Court of Appeal ordered a new trial, although with considerable reluctance. However the present case can be distinguished from Mortgage Express on the ground that in that case the judge appears to have based his decision on a factual matter (Mr Baruch's instructions) which was not before him in evidence. In the present case the evidence was fully deployed before the judge and he saw Mr Leach rigorously cross-examined at length as to his state of mind. Whilst the judge did not define the test of dishonesty which he applied, I think it probable, as I have stated, that he applied the right test, ie the combined test, and did not apply a purely subjective test. In these circumstances I consider that it would not be right to order a retrial. Whilst the decision whether a new trial should be ordered will largely depend on the facts of the particular case, I find support for this view in the judgment of the House in Automatic Wood-Turning Co Ltd v Stringer [1957] AC 544, 555. In that case the Court of Appeal had ordered a new trial on the issue of negligence, but the order was set aside and Lord Morton of Henryton stated:

      "My Lords, I cannot think that this order would have been made if the Court of Appeal had fully appreciated that Oliver J, after hearing all the evidence, had expressed his view that the appellants had not been guilty of negligence at common law. There is no indication in the record that the learned judge had not fully considered the evidence when he expressed this view."

  51. For the reasons which I have given I would allow Mr Leach's appeal and set aside the judgment of the Court of Appeal.

    LORD MILLETT

  52. There are two issues in this appeal. The first is concerned with the nature of the so-called "Quistclose trust" and the requirements for its creation. The second arises only if the first is answered adversely to the appellant. It is whether his conduct rendered him liable for having assisted in a breach of trust. This raises two questions of some importance. One concerns the extent of the knowledge of the existence of a trust which is required before a person can be found civilly liable for having assisted in its breach. In particular, is it sufficient that he was aware of the arrangements which created the trust or must he also have appreciated that they did so? The other, which has led to a division of opinion among your Lordships, is whether, in addition to knowledge, dishonesty is required and, if so, the meaning of dishonesty in this context. For reasons which will appear a third question, concerned with the ingredients of the equitable claim tendentiously described as being in respect of the "knowing receipt" of trust property, is no longer alive. The much needed rationalisation of this branch of the law must, therefore, await another occasion.

    (1)     The facts
  53. The appellant Mr Leach is a solicitor. At the material time he was in sole practice. In October 1992 he was instructed by a Mr Yardley to act in the purchase of residential land at Apperley Bridge, Bradford. The terms of the sale required the payment of £950,000 on exchange of contracts. Exchange took place on 23 December 1992 with the use of moneys obtained from Barclay's Bank.

  54. Mr Yardley was an entrepreneur with a number of irons in the fire. He was involved in several on-going property transactions besides the purchase of the site at Apperley Bridge, but his interests were not confined to the purchase and development of property. He carried on business through a series of one-man companies.

  55. Delays occurred in securing the necessary finance from Barclay's Bank, and by December 1992 Mr Yardley was actively seeking an alternative source of funds. In due course he obtained an offer of a short term loan of £1 million from the respondent Twinsectra Ltd.

  56. Twinsectra was only prepared to make the loan if repayment was secured by a solicitor's personal undertaking, a most unusual requirement. Mr Leach refused to give such an undertaking. Mr Yardley then approached another solicitor, a Mr Sims, who was a member of a two-partner firm. Mr Sims had been involved in some dealings on his own behalf with Mr Yardley as a result of which he owed Mr Yardley $1.5 million. He agreed to give the requisite undertaking.

  57. By this time Barclays Bank had agreed to provide the finance for Apperley Bridge, and the loan from Twinsectra was no longer needed. Mr Yardley and Mr Sims decided to proceed with it nevertheless. They agreed between themselves that Mr Sims would take up the loan on his own account and use it to repay his personal indebtedness to Mr Yardley. Mr Sims' undertaking to repay the loan, originally intended to be by way of guarantee of Mr Yardley's liability to repay the money he was borrowing from Twinsectra, would (as between himself and Mr Yardley) be given by Mr Sims as principal debtor. Mr Yardley knew that if Twinsectra were told of the change the loan would be at risk. The judge found that his failure to tell Twinsectra was dishonest but that he was not liable in deceit for falsely holding Mr Sims out as his solicitor. In the judge's view the representation was essentially true, since Mr Sims had authority to act as Mr Yardley's agent to conclude the loan agreement on his behalf. The Court of Appeal reversed this finding because it did not meet the gravamen of Twinsectra's complaint. This was not that it was misled about the extent of Mr Sims' authority to bind Mr Yardley to the contract of loan. It was that it would not have made the loan if it had known that Mr Sims was no longer acting for Mr Yardley as his client in a property transaction, for in those circumstances he could not properly give a solicitor's undertaking: see United Bank of Kuwait Ltd v Hammoud [1988] 1 WLR 1051. The judge found that on this aspect of the case Mr Leach, too, was not dishonest, but that he was "certainly misguided."

  58. The undertaking was drafted by Twinsectra's solicitors and was signed by Mr Sims on 24 December. It was in the following terms:

      "Dear Sirs,

      In consideration of your providing a loan in the sum of £1,000,000 (one million pounds) to a client of this firm for the purpose of temporary bridging finance in the acquisition of property to be acquired by such client, we hereby personally and irrevocably undertake that:

      1.  The loan monies will be retained by us until such time as they are applied in the acquisition of property on behalf of our client.

      2.  The loan monies will be utilised solely for the acquisition of property on behalf of our client and for no other purpose.

      3.  We will repay to you the said sum of £1,000,000.00 together with interest calculated at the rate of £657.53 per day from the date you instruct your bankers to transfer the loan monies to our client account, such repayment to be made on the earlier of: (a)  the expiry of four calendar months from the date upon which you instruct your bankers to transfer the loan monies to our client account or (b)  the seventh day following our giving written notice to your solicitors of intention to make such repayment.

      4.  We will pay to your solicitors upon receipt by us of the loan monies their charges in connection with the loan in the sum of £1,000.00 plus VAT and disbursements.

      We confirm that this undertaking is given by us in the course of our business as solicitors and in the context of an underlying transaction on behalf of our clients which is part of our usual business as solicitors." (Emphasis added).
  59. The judge found that the letter was fundamentally untrue. Mr Sims was not acting for any client in any relevant property transaction and there was no "underlying transaction on behalf of their clients" still less one which was "part of the usual business of solicitors". While Mr Sims obviously knew this, however, it cannot be assumed that Mr Leach did so. The judge found that Mr Leach "should have been aware" of it if he had thought about it at all (though even this seems somewhat speculative); but he did not find that he was.

  60. Mr Sims had previously on 23 December forwarded a draft of the proposed undertaking to Mr Leach which Mr Leach placed on his file. It did not differ from the final version in any respect material to these proceedings, which are based exclusively on paragraphs 1 and 2 of the undertaking. Those paragraphs were unchanged in the final version, the only substantive amendments being to paragraph 3.

  61. In the letter which accompanied the draft undertaking Mr Sims sought Mr Leach's confirmation on a number of points. These included the following:

      "The matter that concerns me is paragraph 1 which strictly means that my firm has to retain this sum until another property has been acquired. Is the £1,000,000 to be used for another purchase?"

    Mr Sims' concern arose from the fact that, by pre-arrangement with Mr Leach, he intended to pay the money as soon as it was received to Mr Leach as Mr Yardley's solicitor, and realised that this would put him in breach of paragraph 1 of the undertaking. He evidently thought that this would not matter so long as the money was applied in the acquisition of property. Mr Leach clearly understood the reason for Mr Sims' concern, even if (as may be the case) he knew nothing of the arrangement by which Mr Sims had agreed with Mr Yardley that the payment would be treated as discharging his own personal debt.

  62. Mr Leach spoke to Mr Sims by telephone and discussed the proposed undertaking. He told Mr Sims that he would obtain confirmation from Mr Yardley as to the purpose of the loan. As for Mr Sims' undertaking to retain the money, "that was a matter for him" and he "appreciated his difficulty". He told Mr Sims that the moneys would be held by his firm in a separate account "until they are required by Mr Yardley". It was, however, for Mr Sims to decide as he was giving the undertaking and must be satisfied with its wording.

  63. Mr Leach then spoke to Mr Yardley and was told that the money would be used in connection with property acquisitions at Stourport, Apperley Bridge and Droitwich. Mr Leach duly faxed Mr Sims and told him that he had spoken to Mr Yardley and could confirm that the money was to be used for the purchase of property. Mr Leach sent a copy of the fax to Mr Yardley and asked for his instructions to be confirmed by fax. He told Mr Yardley that he would notify him as soon as the moneys were received "so that the funds may be utilised in connection with the purchase of the property you have notified to me". Mr Yardley faxed his confirmation.

  64. All this took place on 23 December before the undertaking was finally signed by Mr Sims on the following day. On the same day, and in anticipation of the receipt of the money from Twinsectra, Mr Sims gave the necessary instructions to his bank to make telegraphic transfers of the bulk of the money to Mr Leach's firm. They were implemented on 29 December.

  65. Mr Leach received £949,985 on 29 December 1992 and a further sum of £14,810 on 19 January 1993. The money was credited to a client account. Over a period between 29 December 1992 and 31 March 1993 the money was disbursed in accordance with the instructions of Yardley or one of his co-directors. Three of the payments totalling £580,875 were applied in the acquisition of property at Stourbridge, Droitwich and Apperley Bridge. The judge held that these payments were within the spirit if not the letter of the undertaking and his finding was upheld by the Court of Appeal. It has not been challenged before us. Three sums totalling £22,000 were retained by Mr Leach in payment of his conveyancing fees. These were the subject of a claim in "knowing receipt". Other sums totalling £357,720.11 were applied on Mr Yardley's instructions otherwise than in connection with the acquisition of property and in breach of paragraph 2 of the undertaking. These were the subject of a claim for "dishonest assistance."

    (2)     The judgments below

  66. The judge found that the undertaking did not create a trust and accordingly dismissed the action. As a result he did not need to make a specific finding of Mr Leach's state of mind in relation to the disbursements. But in summarising his conclusions he stated that he had found that "he was not dishonest, but that he did deliberately shut his eyes to the implications of the undertaking".

  67. The Court of Appeal allowed Twinsectra's appeal. They held that paragraphs 1 and 2 of the undertaking created a Quistclose trust or a trust analogous thereto (which they described as "an express purpose trust") and upheld a tracing claim for proprietary relief against Mr Yardley's companies, which were in administration. They reversed the judge's conclusion that Mr Leach had not been dishonest, holding that the judge's conclusions were consistent only with a finding of what they described as "Nelsonian dishonesty", and gave judgment against him for £379,720.11 and interest.

    (3)     Was there a Quistclose trust?

  68. Money advanced by way of loan normally becomes the property of the borrower. He is free to apply the money as he chooses, and save to the extent to which he may have taken security for repayment the lender takes the risk of the borrower's insolvency. But it is well established that a loan to a borrower for a specific purpose where the borrower is not free to apply the money for any other purpose gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce. In the earlier cases the purpose was to enable the borrower to pay his creditors or some of them, but the principle is not limited to such cases.

  69. Such arrangements are commonly described as creating "a Quistclose trust", after the well-known decision of the House in Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567 in which Lord Wilberforce confirmed the validity of such arrangements and explained their legal consequences. When the money is advanced, the lender acquires a right, enforceable in equity, to see that it is applied for the stated purpose, or more accurately to prevent its application for any other purpose. This prevents the borrower from obtaining any beneficial interest in the money, at least while the designated purpose is still capable of being carried out. Once the purpose has been carried out, the lender has his normal remedy in debt. If for any reason the purpose cannot be carried out, the question arises whether the money falls within the general fund of the borrower's assets, in which case it passes to his trustee-in-bankruptcy in the event of his insolvency and the lender is merely a loan creditor; or whether it is held on a resulting trust for the lender. This depends on the intention of the parties collected from the terms of the arrangement and the circumstances of the case.

  70. In the present case Twinsectra contends that paragraphs 1 and 2 of the undertaking which Mr Sims signed on 24 December created a Quistclose trust. Mr Leach denies this and advances a number of objections to the existence of a trust. He says that Twinsectra lacked the necessary intention to create a trust, and relies on evidence that Twinsectra looked exclusively to Mr Sims' personal undertaking to repay the loan as its security for repayment. He says that commercial life would be impossible if trusts were lightly inferred from slight material, and that it is not enough to agree that a loan is to be made for a particular purpose. There must be something more, for example, a requirement that the money be paid into a segregated account, before it is appropriate to infer that a trust has been created. In the present case the money was paid into Mr Sims' client account, but that is sufficiently explained by the fact that it was not Mr Sims' money but his client's; it provides no basis for an inference that the money was held in trust for anyone other than Mr Yardley. Then it is said that a trust requires certainty of objects and this was lacking, for the stated purpose "to be applied in the purchase of property" is too uncertain to be enforced. Finally it is said that no trust in favour of Twinsectra could arise prior to the failure of the stated purpose, and this did not occur until the money was misapplied by Mr Yardley's companies.

    Intention

  71. The first two objections are soon disposed of. A settlor must, of course, possess the necessary intention to create a trust, but his subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them. Whether paragraphs 1 and 2 of the undertaking created a Quistclose trust turns on the true construction of those paragraphs.

  72. The fact that Twinsectra relied for its security exclusively on Mr Sims' personal liability to repay goes to Twinsectra's subjective intention and is not relevant to the construction of the undertaking, but it is in any case not inconsistent with the trust alleged. Arrangements of this kind are not intended to provide security for repayment of the loan, but to prevent the money from being applied otherwise than in accordance with the lender's wishes. If the money is properly applied the loan is unsecured. This was true of all the decided cases, including the Quistclose case itself.

    The effect of the undertaking

  73. A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cash-flow. Commercial life would be impossible if this were not the case.

  74. The question in every case is whether the parties intended the money to be at the free disposal of the recipient: In re Goldcorp Exchange Ltd [1995] 1 AC 74, 100 per Lord Mustill. His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose, for as Lord Wilberforce observed in the Quistclose case [1970] AC 567, 580:

      "A necessary consequence from this, by a process simply of interpretation, must be that if, for any reason, [the purpose could not be carried out,] the money was to be returned to [the lender]: the word 'only' or 'exclusively' can have no other meaning or effect."

    In the Quistclose case a public quoted company in financial difficulties had declared a final dividend. Failure to pay the dividend, which had been approved by the shareholders, would cause a loss of confidence and almost certainly drive the company into liquidation. Accordingly the company arranged to borrow a sum of money "on condition that it is used to pay the forthcoming dividend". The money was paid into a special account at the company's bank, with which the company had an overdraft. The bank confirmed that the money

      "will only be used for the purpose of paying the dividend due on 24 July 1964".

    The House held that the circumstances were sufficient to create a trust of which the bank had notice, and that when the company went into liquidation without having paid the dividend the money was repayable to the lender.

  75. In the present case paragraphs 1 and 2 of the undertaking are crystal clear. Mr Sims undertook that the money would be used solely for the acquisition of property and for no other purpose; and was to be retained by his firm until so applied. It would not be held by Mr Sims simply to Mr Yardley's order; and it would not be at Mr Yardley's free disposition. Any payment by Mr Sims of the money, whether to Mr Yardley or anyone else, otherwise than for the acquisition of property would constitute a breach of trust.

  76. Mr Leach insisted that such a payment would, no doubt, constitute a breach of contract, but there was no reason to invoke equitable principles merely because Mr Sims was a solicitor. But Mr Sims' status as a solicitor has nothing to do with it. Equity's intervention is more principled than this. It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract. As North J explained in Gibert v Gonard (1884) 54 LJ Ch 439, 440:

      "It is very well known law that if one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given. He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose."

    The duty is not contractual but fiduciary. It may exist despite the absence of any contract at all between the parties, as in Rose v Rose (1986) 7 NSWLR 679; and it binds third parties as in the Quistclose case itself. The duty is fiduciary in character because a person who makes money available on terms that it is to be used for a particular purpose only and not for any other purpose thereby places his trust and confidence in the recipient to ensure that it is properly applied. This is a classic situation in which a fiduciary relationship arises, and since it arises in respect of a specific fund it gives rise to a trust.

    The nature of the trust

  77. The latter two objections cannot be so easily disposed of. They call for an exploration of the true nature of the Quistclose trust, and in particular the location of the beneficial interest while the purpose is still capable of being carried out.

  78. This has been the subject of much academic debate. The starting point is provided by two passages in Lord Wilberforce's speech in the Quistclose case [1970] AC 567. At p 580, he said:

      "That arrangements of this character for the payment of a person's creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years."

    Later, at p 581, he said:

      "[W]hen the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose (see In re Rogers [(1891)] 8 Morr 243 where both Lindley LJ and Kay LJ recognised this)."

  79. These passages suggest that there are two successive trusts, a primary trust for payment to identifiable beneficiaries, such as creditors or shareholders, and a secondary trust in favour of the lender arising on the failure of the primary trust. But there are formidable difficulties in this analysis, which has little academic support. What if the primary trust is not for identifiable persons, but as in the present case to carry out an abstract purpose? Where in such a case is the beneficial interest pending the application of the money for the stated purpose or the failure of the purpose? There are four possibilities: (i) in the lender; (ii) in the borrower; (iii) in the contemplated beneficiary; or (iv) in suspense.

  80. (i). The lender. In "The Quistclose Trust: Who Can Enforce It?" (1985) 101 LQR, 269, I argued that the beneficial interest remained throughout in the lender. This analysis has received considerable though not universal academic support: see for example Priestley J "The Romalpa Clause and the Quistclose Trust" in Equity and Commercial Transactions, ed Finn (1987) 217, 237; and Professor M Bridge "The Quistclose Trust in a World of Secured Transactions" (1992) 12 OJLS 333, 352; and others. It was adopted by the New Zealand Court of Appeal in General Communications Ltd v Development Finance Corporation of New Zealand Ltd; [1990] 3 NZLR 406 and referred to with apparent approval by Gummow J in In re Australian Elizabethan Theatre Trust (1991) 102 ALR 681. Gummow J saw nothing special in the Quistclose trust, regarding it as essentially a security device to protect the lender against other creditors of the borrower pending the application of the money for the sated purpose.

  81. On this analysis, the Quistclose trust is a simple commercial arrangement akin (as Professor Bridge observes) to a retention of title clause (though with a different object) which enables the borrower to have recourse to the lender's money for a particular purpose without entrenching on the lender's property rights more than necessary to enable the purpose to be achieved. The money remains the property of the lender unless and until it is applied in accordance with his directions, and insofar as it is not so applied it must be returned to him. I am disposed, perhaps pre-disposed, to think that this is the only analysis which is consistent both with orthodox trust law and with commercial reality. Before reaching a concluded view that it should be adopted, however, I must consider the alternatives.

  82. (ii). The borrower. It is plain that the beneficial interest is not vested unconditionally in the borrower so as to leave the money at his free disposal. That would defeat the whole purpose of the arrangements, which is to prevent the money from passing to the borrower's trustee-in-bankruptcy in the event of his insolvency. It would also be inconsistent with all the decided cases where the contest was between the lender and the borrower's trustee-in-bankruptcy, as well as with the Quistclose case itself: see in particular Toovey v Milne (1819) 2 B & A 683; In re Rogers, Ex p Holland and Hannen (1891) 8 Morr 243 (supra).

  83. The borrower's interest pending the application of the money for the stated purpose or its return to the lender is minimal. He must keep the money separate; he cannot apply it except for the stated purpose; unless the terms of the loan otherwise provide he must return it to the lender if demanded; he cannot refuse to return it if the stated purpose cannot be achieved; and if he becomes bankrupt it does not vest in his trustee in bankruptcy. If there is any content to beneficial ownership at all, the lender is the beneficial owner and the borrower is not.

  84. In the present case the Court of Appeal adopted a variant, locating the beneficial interest in the borrower but subject to restrictions. I shall have to return to this analysis later.

  85. (iii). In the contemplated beneficiary. In the Quistclose case itself [1970] AC 567, as in all the reported cases which preceded it, either the primary purpose had been carried out and the contest was between the borrower's trustee-in bankruptcy or liquidator and the person or persons to whom the borrower had paid the money; or it was treated as having failed, and the contest was between the borrower's trustee-in-bankruptcy and the lender. It was not necessary to explore the position while the primary purpose was still capable of being carried out and Lord Wilberforce's observations must be read in that light.

  86. The question whether the primary trust is accurately described as a trust for the creditors first arose in In re Northern Developments Holdings Ltd (unreported) 6 October 1978, where the contest was between the lender and the creditors. The borrower, which was not in liquidation and made no claim to the money, was the parent company of a group one of whose subsidiaries was in financial difficulty. There was a danger that if it were wound up or ceased trading it would bring down the whole group. A consortium of the group's banks agreed to put up a fund of more than £500,000 in an attempt to rescue the subsidiary. They paid the money into a special account in the name of the parent company for the express purpose of "providing money for the subsidiary's unsecured creditors over the ensuing weeks" and for no other purpose. The banks' object was to enable the subsidiary to continue trading, though on a reduced scale; it failed when the subsidiary was put into receivership at a time when some £350,000 remained unexpended. Relying on Lord Wilberforce's observations in the passages cited above, Sir Robert Megarry V-C held that the primary trust was a purpose trust enforceable (inter alios) by the subsidiaries' creditors as the persons for whose benefit the trust was created.

  87. There are several difficulties with this analysis. In the first place, Lord Wilberforce's reference to In re Rogers 8 Morr 243 makes it plain that the equitable right he had in mind was not a mandatory order to compel performance, but a negative injunction to restrain improper application of the money; for neither Lindley LJ nor Kay LJ recognised more than this. In the second place, the object of the arrangements was to enable the subsidiary to continue trading, and this would necessarily involve it in incurring further liabilities to trade creditors. Accordingly the application of the fund was not confined to existing creditors at the date when the fund was established. The company secretary was given to understand that the purpose of the arrangements was to keep the subsidiary trading, and that the fund was "as good as share capital". Thus the purpose of the arrangements was not, as in other cases, to enable the debtor to avoid bankruptcy by paying off existing creditors, but to enable the debtor to continue trading by providing it with working capital with which to incur fresh liabilities. There is a powerful argument for saying that the result of the arrangements was to vest a beneficial interest in the subsidiary from the start. If so, then this was not a Quistclose trust at all.

  88. In the third place, it seems unlikely that the banks' object was to benefit the creditors (who included the Inland Revenue) except indirectly. The banks had their own commercial interests to protect by enabling the subsidiary to trade out of its difficulties. If so, then the primary trust cannot be supported as a valid non-charitable purpose trust: see In re Grant's Will Trusts [1980] 1 WLR 360 and cf In re Denley's Trust Deed [1969] 1 Ch 373.

  89. The most serious objection to this approach is exemplified by the facts of the present case. In several of the cases the primary trust was for an abstract purpose with no one but the lender to enforce performance or restrain misapplication of the money. In Edwards v Glyn (1859) 2 E & E the money was advanced to a bank to enable the bank to meet a run. In In re EVTR, Gilbert v Barber [1987] BCLC 646 it was advanced "for the sole purpose of buying new equipment". In General Communications Ltd v Development Finance Corporation of New Zealand Ltd [1990] 3 NZLR 406 the money was paid to the borrower's solicitors for the express purpose of purchasing new equipment. The present case is another example. It is simply not possible to hold money on trust to acquire unspecified property from an unspecified vendor at an unspecified time. There is no reason to make an arbitrary distinction between money paid for an abstract purpose and money paid for a purpose which can be said to benefit an ascertained class of beneficiaries, and the cases rightly draw no such distinction. Any analysis of the Quistclose trust must be able to accommodate gifts and loans for an abstract purpose.

  90. (iv) In suspense. As Peter Gibson J pointed out in Carreras Rothmans Ltd v Freeman Matthews Treasure Ltd [1985] Ch 207, 223 the effect of adopting Sir Robert Megarry V-C's analysis is to leave the beneficial interest in suspense until the stated purpose is carried out or fails. The difficulty with this (apart from its unorthodoxy) is that it fails to have regard to the role which the resulting trust plays in equity's scheme of things, or to explain why the money is not simply held on a resulting trust for the lender.

  91. Lord Browne-Wilkinson gave an authoritative explanation of the resulting trust in Westdeutsche Landesbank Girpcentrale v Islington Borough Council [1996] AC 669, 708C and its basis has been further illuminated by Dr R Chambers in his book Resulting Trusts published in 1997. Lord Browne-Wilkinson explained that a resulting trust arises in two sets of circumstances. He described the second as follows:

      "Where A transfers property to B on express trusts, but the trusts declared do not exhaust the whole beneficial interest."

    The Quistclose case [1970] AC 567 was among the cases he cited as examples. He rejected the argument that there was a resulting trust in the case before him because, unlike the situation in the present case, there was no transfer of money on express trusts. But he also rejected the argument on a wider and, in my respectful opinion, surer ground that the money was paid and received with the intention that it should become the absolute property of the recipient.

  92. The central thesis of Dr Chambers' book is that a resulting trust arises whenever there is a transfer of property in circumstances in which the transferor (or more accurately the person at whose expense the property was provided) did not intend to benefit the recipient. It responds to the absence of an intention on the part of the transferor to pass the entire beneficial interest, not to a positive intention to retain it. Insofar as the transfer does not exhaust the entire beneficial interest, the resulting trust is a default trust which fills the gap and leaves no room for any part to be in suspense. An analysis of the Quistclose trust as a resulting trust for the transferor with a mandate to the transferee to apply the money for the stated purpose sits comfortably with Dr Chambers' thesis, and it might be thought surprising that he does not adopt it.

  93. (v). The Court of Appeal's analysis. The Court of Appeal were content to treat the beneficial interest as in suspense, or (following Dr Chambers' analysis) to hold that it was in the borrower, the lender having merely a contractual right enforceable by injunction to prevent misapplication. Potter LJ put it in these terms [1999] Lloyd's Rep Bank 438 , 456, para 75:

      "The purpose imposed at the time of the advance creates an enforceable restriction on the borrower's use of the money. Although the lender's right to enforce the restriction is treated as arising on the basis of a 'trust', the use of that word does not enlarge the lender's interest in the fund. The borrower is entitled to the beneficial use of the money, subject to the lender's right to prevent its misuse; the lender's limited interest in the fund is sufficient to prevent its use for other than the special purpose for which it was advanced."

    This analysis, with respect, is difficult to reconcile with the court's actual decision insofar as it granted Twinsectra a proprietary remedy against Mr Yardley's companies as recipients of the misapplied funds. Unless the money belonged to Twinsectra immediately before its misapplication, there is no basis on which a proprietary remedy against third party recipients can be justified.

  94. Dr Chambers' "novel view" (as it has been described) is that the arrangements do not create a trust at all; the borrower receives the entire beneficial ownership in the money subject only to a contractual right in the lender to prevent the money being used otherwise than for the stated purpose. If the purpose fails, a resulting trust in the lender springs into being. In fact, he argues for a kind of restrictive covenant enforceable by negative injunction yet creating property rights in the money. But restrictive covenants, which began life as negative easements, are part of our land law. Contractual obligations do not run with money or a chose in action like money in a bank account.

  95. Dr Chambers' analysis has attracted academic comment, both favourable and unfavourable. For my own part, I do not think that it can survive the criticism levelled against it by Lusina Ho and P St J Smart: "Reinterpreting the Quistclose Trust: A Critique of Chambers' Analysis" (2001) 21 OJLS 267. It provides no solution to cases of non-contractual payment; is inconsistent with Lord Wilberforce's description of the borrower's obligation as fiduciary and not merely contractual; fails to explain the evidential significance of a requirement that the money should be kept in a separate account; cannot easily be reconciled with the availability of proprietary remedies against third parties; and while the existence of a mere equity to prevent misapplication would be sufficient to prevent the money from being available for distribution to the creditors on the borrower's insolvency (because the trustee-in-bankruptcy has no greater rights than his bankrupt) it would not prevail over secured creditors. If the bank in the Quistclose case [1970] AC 567 had held a floating charge (as it probably did) and had appointed a receiver, the adoption of Dr Chambers' analysis should have led to a different outcome.

  96. Thus all the alternative solutions have their difficulties. But there are two problems which they fail to solve, but which are easily solved if the beneficial interest remains throughout in the lender. One arises from the fact, well established by the authorities, that the primary trust is enforceable by the lender. But on what basis can he enforce it? He cannot do so as the beneficiary under the secondary trust, for if the primary purpose is fulfilled there is no secondary trust: the pre-condition of his claim is destructive of his standing to make it. He cannot do so as settlor, for a settlor who retains no beneficial interest cannot enforce the trust which he has created.

  97. Dr Chambers insists that the lender has merely a right to prevent the misapplication of the money, and attributes this to his contractual right to specific performance of a condition of the contract of loan. As I have already pointed out, this provides no solution where the arrangement is non-contractual. But Lord Wilberforce clearly based the borrower's obligation on an equitable or fiduciary basis and not a contractual one. He was concerned to justify the co-existence of equity's exclusive jurisdiction with the common law action for debt. Basing equity's intervention on its auxiliary jurisdiction to restrain a breach of contract would not have enabled the lender to succeed against the bank, which was a third party to the contract. There is only one explanation of the lender's fiduciary right to enforce the primary trust which can be reconciled with basic principle: he can do so because he is the beneficiary.

  98. The other problem is concerned with the basis on which the primary trust is said to have failed in several of the cases, particularly Toovey v Milne 2 B & A 683 and the Quistclose case itself [1970] AC 567. Given that the money did not belong to the borrower in either case, the borrower's insolvency should not have prevented the money from being paid in the manner contemplated. A man cannot pay some only of his creditors once he has been adjudicated bankrupt, but a third party can. A company cannot pay a dividend once it has gone into liquidation, but there is nothing to stop a third party from paying the disappointed shareholders. The reason why the purpose failed in each case must be because the lender's object in making the money available was to save the borrower from bankruptcy in the one case and collapse in the other. But this in itself is not enough. A trust does not fail merely because the settlor's purpose in creating it has been frustrated: the trust must become illegal or impossible to perform. The settlor's motives must not be confused with the purpose of the trust; the frustration of the former does not by itself cause the failure of the latter. But if the borrower is treated as holding the money on a resulting trust for the lender but with power (or in some cases a duty) to carry out the lender's revocable mandate, and the lender's object in giving the mandate is frustrated, he is entitled to revoke the mandate and demand the return of money which never ceased to be his beneficially.

  99. There is a further point which is well brought out in the judgment of the Court of Appeal. On a purchase of land it is a commonplace for the purchaser's mortgagee to pay the mortgage money to the purchaser's solicitor against his undertaking to apply it in the payment of the purchase price in return for a properly executed conveyance from the vendor and mortgage to the mortgagee. There is no doubt that the solicitor would commit a breach of trust if he were to apply it for any other purpose, or to apply it for the stated purpose if the mortgagee countermanded his instructions: see Bristol and West Building Society v Mothew [1998] Ch 1, 22. It is universally acknowledged that the beneficiary of the trust, usually described as an express or implied trust, is the mortgagee. Until paid in accordance with the mortgagee's instructions or returned it is the property of the mortgagee in equity, and the mortgagee may trace the money and obtain proprietary relief against a third party: Boscawen v Bajwa [1996] 1 WLR 328. It is often assumed that the trust arises because the solicitor has become the mortgagee's solicitor for the purpose of completion. But that was not the case in Barclays Bank Plc v Weeks Legg and Dean [1999] QB 309, 324, where the solicitor's undertaking was the only communication passing between the mortgagee and the solicitor. I said:

      "The function of the undertaking is to prescribe the terms upon which the solicitor receives the money remitted by the bank. Such money is trust money which belongs in equity to the bank but which the solicitor is authorised to disburse in accordance with the terms of the undertaking but not otherwise. Parting with the money otherwise than in accordance with the undertaking constitutes at one and the same time a breach of a contractual undertaking and a breach of the trust on which the money is held."

    The case is, of course, even closer to the present than the traditional cases in which a Quistclose trust has been held to have been created. I do not think that subtle distinctions should be made between "true" Quistclose trusts and trusts which are merely analogous to them. It depends on how widely or narrowly you choose to define the Quistclose trust. There is clearly a wide range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other's money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out. The arrangement between the purchaser's solicitor and the purchaser's mortgagee is an example of just such an arrangement. All such arrangements should if possible be susceptible to the same analysis.

  100. As Sherlock Holmes reminded Dr Watson, when you have eliminated the impossible, whatever remains, however improbable, must be the truth. I would reject all the alternative analyses, which I find unconvincing for the reasons I have endeavoured to explain, and hold the Quistclose trust to be an entirely orthodox example of the kind of default trust known as a resulting trust. The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and insofar as he does not it is held on a resulting trust for the lender from the outset. Contrary to the opinion of the Court of Appeal, it is the borrower who has a very limited use of the money, being obliged to apply it for the stated purpose or return it. He has no beneficial interest in the money, which remains throughout in the lender subject only to the borrower's power or duty to apply the money in accordance with the lender's instructions. When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money. Whether the borrower is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the borrower's mandate while it is still capable of being carried out, must depend on the circumstances of the particular case.

    Certainty

  101. After this over-long exposition, it is possible to dispose of the remaining objections to the creation of a Quistclose trust very shortly. A trust must have certainty of objects. But the only trust is the resulting trust for the lender. The borrower is authorised (or directed) to apply the money for a stated purpose, but this is a mere power and does not constitute a purpose trust. Provided the power is stated with sufficient clarity for the court to be able to determine whether it is still capable of being carried out or whether the money has been misapplied, it is sufficiently certain to be enforced. If it is uncertain, however, then the borrower has no authority to make any use of the money at all and must return it to the lender under the resulting trust. Uncertainty works in favour of the lender, not the borrower; it cannot help a person in the position of Mr Leach.

    When the trust in favour of the lender arises

  102. Like all resulting trusts, the trust in favour of the lender arises when the lender parts with the money on terms which do not exhaust the beneficial interest. It is not a contingent reversionary or future interest. It does not suddenly come into being like an eighteenth century use only when the stated purpose fails. It is a default trust which fills the gap when some part of the beneficial interest is undisposed of and prevents it from being "in suspense".

    Conclusion

  103. In my opinion the Court of Appeal were correct to find that the terms of paragraphs 1 and 2 of the undertaking created a Quistclose trust. The money was never at Mr Yardley's free disposal. It was never held to his order by Mr Sims. The money belonged throughout to Twinsectra, subject only to Mr Yardley's right to apply it for the acquisition of property. Twinsectra parted with the money to Mr Sims, relying on him to ensure that the money was properly applied or returned to it. Mr Sims act in paying the money over to Mr Leach was a breach of trust, but it did not in itself render the money incapable of being applied for the stated purpose. Insofar as Mr Leach applied the money in the acquisition of property, the purpose was achieved.

    (4)     Knowing (or dishonest) assistance

  104. Before turning to the critical questions concerning the extent of the knowledge required and whether a finding of dishonesty is a necessary condition of liability, I ought to say a word about the distinction between the "knowing receipt" of trust money and "knowing (or dishonest) assistance" in a breach of trust; and about the meaning of "assistance" in this context.

  105. Liability for "knowing receipt" is receipt-based. It does not depend on fault. The cause of action is restitutionary and is available only where the defendant received or applied the money in breach of trust for his own use and benefit: see Agip (Africa) Ltd v Jackson [1990] Ch 265, 291-2; Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, 386. There is no basis for requiring actual knowledge of the breach of trust, let alone dishonesty, as a condition of liability. Constructive notice is sufficient, and may not even be necessary. There is powerful academic support for the proposition that the liability of the recipient is the same as in other cases of restitution, that is to say strict but subject to a change of position defence.

  106. Mr Leach received sums totalling £22,000 in payment of his costs for his own use and benefit, and Twinsectra seek their repayment on the ground of knowing receipt. But he did not receive the rest of the money for his own benefit at all. He never regarded himself as beneficially entitled to the money. He held it to Mr Yardley's order and paid it out to Mr Yardley or his companies. Twinsectra cannot and does not base its claim in respect of these moneys in knowing receipt, not for want of knowledge, but for want of the necessary receipt. It sues in respect of knowing (or dishonest) assistance.

  107. The accessory's liability for having assisted in a breach of trust is quite different. It is fault-based, not receipt-based. The defendant is not charged with having received trust moneys for his own benefit, but with having acted as an accessory to a breach of trust. The action is not restitutionary; the claimant seeks compensation for wrongdoing. The cause of action is concerned with attributing liability for misdirected funds. Liability is not restricted to the person whose breach of trust or fiduciary duty caused their original diversion. His liability is strict. Nor is it limited to those who assist him in the original breach. It extends to everyone who consciously assists in the continuing diversion of the money. Most of the cases have been concerned, not with assisting in the original breach, but in covering it up afterwards by helping to launder the money. Mr Leach's wrongdoing is not confined to the assistance he gave Mr Sims to commit a breach of trust by receiving the money from him knowing that Mr Sims should not have paid it to him (though this is sufficient to render him liable for any resulting loss); it extends to the assistance he gave in the subsequent misdirection of the money by paying it out to Mr Yardley's order without seeing to its proper application.

    The ingredients of accessory liability

  108. The classic formulation of this head of liability is that of Lord Selborne LC in Barnes v Addy (1874) LR 9 Ch App 244, 251. Third parties who were not themselves trustees were liable if they were found

      "either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust".

    In the next passage of his judgment, at p 252, he amplified this by referring to those who

      "assist with knowledge in a dishonest and fraudulent design on the part of the trustees".

  109. There were thus two conditions of liability: the defendant must have assisted (i) with knowledge (ii) in a fraudulent breach of trust. The second condition was discarded in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. Henceforth, it was sufficient that the defendant was accessory to any breach of trust whether fraudulent or not. The question for present decision is concerned with the first condition. Since that case it has been clear that actual knowledge is necessary; the question is whether it is sufficient, or whether there is an additional requirement of dishonesty in the subjective sense in which that term is used in criminal cases.

  110. Prior to the decision in Royal Brunei Airlines Sdn Bhd v Tan the equitable claim was described as "knowing assistance". It gave a remedy against third parties who knowingly assisted in the misdirection of funds. The accessory was liable if he knew all the relevant facts, in particular the fact that the principal was not entitled to deal with the funds entrusted to him as he had done or was proposing to do. Unfortunately, the distinction between this form of fault-based liability and the liability to make restitution for trust money received in breach of trust was not always observed, and it was even suggested from time to time that the requirements of liability should be the same in the two cases. Authorities on one head of liability were applied in cases which concerned the other, and judges embarked on sophisticated analyses of the kind of knowledge required to found liability.

  111. Behind the confusion there lay a critical issue: whether negligence alone was sufficient to impose liability on the accessory. If so, then it was unnecessary to show that he possessed actual knowledge of the relevant facts. Despite a divergence of judicial opinion, by 1995 the tide was flowing strongly in favour of rejecting negligence. It was widely thought that the accessory should be liable only if he actually knew the relevant facts. It should not be sufficient that he ought to have known them or had the means of knowledge if he did not in fact know them.

  112. There was a gloss on this. It is dishonest for a man deliberately to shut his eyes to facts which he would prefer not to know. If he does so, he is taken to have actual knowledge of the facts to which he shut his eyes. Such knowledge has been described as "Nelsonian knowledge", meaning knowledge which is attributed to a person as a consequence of his "wilful blindness" or (as American lawyers describe it) "contrived ignorance". But a person's failure through negligence to make inquiry is insufficient to enable knowledge to be attributed to him: see Agip (Africa) Ltd v Jackson [1990] Ch 265, 293.

  113. In his magisterial opinion in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, every word of which merits close attention, Lord Nicholls firmly rejected negligence as a sufficient condition of accessory liability. The accessory must be guilty of intentional wrongdoing. But Lord Nicholls did not, in express terms at least, substitute intentional wrongdoing as the condition of liability. He substituted dishonesty. Dishonesty, he said, was a necessary and sufficient ingredient of accessory liability. "Knowingly" was better avoided as a defining ingredient of the principle, and the scale of knowledge accepted in Baden v Sociétié Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 was best forgotten. His purpose, as he made clear, was to get away from the refinements which had been introduced into the concept of knowledge in the context of accessory liability.

    The meaning of dishonesty in this context

  114. In taking dishonesty to be the condition of liability, however, Lord Nicholls used the word in an objective sense. He did not employ the concept of dishonesty as it is understood in criminal cases. He explained the sense in which he was using the word at [1995] 2 AC 378, 389 as follows:

      "Whatever may be the position in some criminal or other contexts (see, for instance, R v Ghosh [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. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. 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. In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. 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. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless."

    Dishonesty as a state of mind or as a course of conduct?

  115. In R v Ghosh [1982] QB 1053 Lord Lane CJ drew a distinction between dishonesty as a state of mind and dishonesty as a course of conduct, and held that dishonesty in section 1 of the Theft Act 1968 referred to dishonesty as a state of mind. The question was not whether the accused had in fact acted dishonestly but whether he was aware that he was acting dishonestly. The jury must first of all decide whether the conduct of the accused was dishonest according to the ordinary standards of reasonable and honest people. That was an objective test. If he was not dishonest by those standards, that was an end of the matter and the prosecution failed. If it was dishonest by those standards, the jury had secondly to consider whether the accused was aware that what he was doing was dishonest by those standards. That was a subjective test. Given his actual (subjective) knowledge the accused must have fallen below ordinary (objective) standards of honesty and (subjectively) have been aware that he was doing so.

  116. The same test of dishonesty is applicable in civil cases where, for example, liability depends upon intent to defraud, for this connotes a dishonest state of mind. Aktieselskabet Dansk Skibsfinansiering v Brothers [2001] 2 BCLC 324 was a case of this kind (trading with intent to defraud creditors). But it is not generally an appropriate condition of civil liability, which does not ordinarily require a guilty mind. Civil liability is usually predicated on the defendant's conduct rather than his state of mind; it results from his negligent or unreasonable behaviour or, where this is not sufficient, from intentional wrongdoing.

  117. A dishonest state of mind might logically have been required when it was thought that the accessory was liable only if the principal was guilty of a fraudulent breach of trust, for then the claim could have been regarded as the equitable counterpart of the common law conspiracy to defraud. But this requirement was discarded in Royal Brunei Airlines Sdn Bhd v Tan [1995] .2 AC 378

  118. It is, therefore, not surprising that Lord Nicholls rejected a dishonest state of mind as an appropriate condition of liability. This is evident from the opening sentence of the passage cited above, from his repeated references both in that passage and later in his judgment to the defendant's conduct in "acting dishonestly" and "advertent conduct", and from his statement that "for the most part" (ie not always) it involves "conscious impropriety". "Honesty", he said, "is a description of a type of conduct assessed in the light of what a person actually knew at the time." Usually ("for the most part"), no doubt, the defendant will have been guilty of "conscious impropriety"; but this is not a condition of liability. The defendant, Lord Nicholls said, at p 390E, was "required to act honestly"; and he indicated that Knox J had captured the flavour of dishonesty in Cowan de Groot Properties Ltd v Eagle Trust Plc [1992] 4 All ER 700, 761 when he referred to a person who is "guilty of commercially unacceptable conduct in the particular context involved." There is no trace in Lord Nicholls' opinion that the defendant should have been aware that he was acting contrary to objective standards of dishonesty. In my opinion, in rejecting the test of dishonesty adopted in R v Ghosh [1982] QB 1053, Lord Nicholls was using the word to characterise the defendant's conduct, not his state of mind.

  119. Lord Nicholls had earlier drawn an analogy with the tort of procuring a breach of contract. He observed, at p 387 B-C, that a person who knowingly procures a breach of contract, or who knowingly interferes with the due performance of a contract, is liable in damages to the innocent party. The rationale underlying the accessory's liability for a breach of trust, he said, was the same. It is scarcely necessary to observe that dishonesty is not a condition of liability for the common law cause of action. This is a point to which I must revert later; for the moment, it is sufficient to say that procuring a breach of contract is an intentional tort, but it does not depend on dishonesty. Lord Nicholls was not of course confusing knowledge with dishonesty. But his approach to dishonesty is premised on the belief that it is dishonest for a man consciously to participate in the misapplication of money.

  120. This is evident by the way in which Lord Nicholls dealt with the difficult case where the propriety of the transaction is doubtful. An honest man, he considered, would make appropriate enquiries before going ahead. This assumes that an honest man is one who would not knowingly participate in a transaction which caused the misapplication of funds. But it is most clearly evident in the way in which Lord Nicholls described the conduct of the defendant in the case under appeal. The question was whether he was personally liable for procuring or assisting in a breach of trust committed by his company. The trust was created by the terms of a contract entered into between the company, which carried on the business of a travel agency, and an airline. The contract required money obtained from the sale of the airline's tickets to be placed in a special trust account. The company failed to pay the money into a special account but used it to fund its own cash flow. Lord Nicholls described the defendant's conduct, at p 393:

      "In other words, he caused or permitted his company to apply the money in a way he knew was not authorised by the trust of which the company was trustee. Set out in these bald terms, the defendant's conduct was dishonest."

    There was no evidence and Lord Nicholls did not suggest that the defendant realised that honest people would regard his conduct as dishonest. Nor did the plaintiff put its case so high. It contended that the company was liable because it made unauthorised use of trust money, and that the defendant was liable because he caused or permitted his company to do so despite his knowledge that its use of the money was unauthorised. This was enough to make the defendant liable, and for Lord Nicholls to describe his conduct as dishonest.

  121. In my opinion Lord Nicholls was adopting an objective standard of dishonesty by which the defendant is expected to attain the standard which would be observed by an honest person placed in similar circumstances. Account must be taken of subjective considerations such as the defendant's experience and intelligence and his actual state of knowledge at the relevant time. But it is not necessary that he should actually have appreciated that he was acting dishonestly; it is sufficient that he was.

  122. This is the way in which Lord Nicholls' use of the term "dishonesty" was understood by Mance LJ in Grupo Torras SA v Al-Sabah [1999] CLC 1469. It is also the way in which it has been widely understood by practitioners: see William Blair QC "Secondary Liability of Financial Institutions for the Fraud of Third Parties" (2000) 30 Hong Kong Law Journal 74; Jeremy Chan "Dishonesty and Knowledge" (2001) 31 Hong Kong Law Journal 283; Andrew Stafford QC "Solicitors' liability for knowing receipt and dishonest assistance in breach of trust" (2001) 17 Professional Negligence 3. Mr Blair QC, at p 83, welcomed the "more pragmatic and workable test of objective dishonesty". Mr Stafford QC, at p 14, invited your Lordships to

      "Reiterate that honesty is an objective standard and that individuals are not free to set their own standards of proper conduct;

    "Direct that trial judges should reach specific conclusions as to whether an honest person, having the same knowledge, experience and attributes as the defendant, would have appreciated that what he was doing would be regarded as wrong or improper; "Direct that if the hypothetical honest person would have appreciated that what he was doing was wrong or improper, then it is appropriate to conclude that the defendant acted dishonestly; "Deprecate attempts to over-refine degrees of knowledge and tests of dishonesty."

    This is almost entirely objective. The only subjective elements are those relating to the defendant's knowledge, experience and attributes. The objective elements include not only the standard of honesty (which is not controversial) but also the recognition of wrongdoing. The question is whether an honest person would appreciate that what he was doing was wrong or improper, not whether the defendant himself actually appreciated this. The third limb of the test established for criminal cases in R v Ghosh [1982] QB 1053 is conspicuously absent. But there is no trace of it in Lord Nicholls' opinion in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 either.

  123. Judges have frequently used the word dishonesty in civil cases in an objective sense to describe deliberate wrongdoing, particularly when handling equitable concepts such as concealed fraud. In Beaman v ARTS Ltd [1949] 1 KB 550 the defendants were sued for conversion. They had stored packages for the plaintiff. The plaintiff found herself stranded in enemy occupied Europe during the war and was unable to communicate with the defendants. The defendant's manager, who was about to be called up and was anxious to close the business down for the duration, opened the packages. Finding their contents to be of little or no value, he considered himself justified in giving them away to the Salvation Army, though he kept one package for himself. The trial judge (Denning J) expressly acquitted the manager of dishonesty or moral turpitude. Reversing the judge, Lord Greene MR described the defendant's conduct as reprehensible. They would, he said, at p 561:

      "no doubt be shocked to hear their conduct described as fraudulent. That is, however, quite immaterial. Mr Ingram, who misappropriated one of the plaintiff's cases for his own use, was no doubt shocked when counsel described his action as stealing. No amount of self-deception can make a dishonest action other than dishonest; nor does an action which is essentially dishonest become blameless because it is committed with a good motive" (emphasis added).

    This is as clear a statement of principle as can be imagined. Neither an honest motive nor an innocent state of mind will save a defendant whose conduct is objectively dishonest. Mr Ingram was not criminally dishonest, since it never entered his head that other people would regard his conduct as dishonest. But equity looks to a man's conduct, not to his state of mind.

  124. The Law Commission must plead guilty of the same usage. In their Report on Limitation of Actions (Law Com No 270) they propose replacing the expression "deliberate concealment" in Section 32(1)(b) of the Limitation Act 1980 by "dishonest concealment". They explain this concept, at paragraph 3.137 of their Report as follows:

      "We are of the view that our proposals in relation to 'concealment' should only apply where the defendant has been guilty of 'unconscionable conduct' - or in other words, if the concealment can be said to be 'dishonest' … the claimant must show that the defendant was being dishonest in [concealing information]. We do not consider that the concealment could be described as 'dishonest' unless the person concealing it is aware of what is being concealed and does not wish the claimant to discover it … by covering up shallow foundations the builder . . . . cannot be said to have been guilty of 'dishonest concealment' unless he was aware that his work was defective or negligent, and does not want the claimant to discover this" (emphasis added).

        In the context it is clear that the Law Commission are indicating requirements which are not only necessary but sufficient. It would be self-defeating to require the plaintiff to establish subjective dishonesty: many people would see nothing wrong, and certainly nothing dishonest, in seeking to avoid legal liability by refraining from disclosing their breach of duty to a potential plaintiff.

  125. The modern tendency is to deprecate the use of words like "fraud" and "dishonesty" as synonyms for moral turpitude or conduct which is morally reprehensible. There is much to be said for semantic reform, that is to say for changing the language while retaining the incidents of equitable liability; but there is nothing to be said for retaining the language and giving it the meaning it has in criminal cases so as to alter the incidents of equitable liability.

    Should subjective dishonesty be required?

  126. The question for your Lordships is not whether Lord Nicholls was using the word dishonesty in a subjective or objective sense in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. The question is whether a plaintiff should be required to establish that an accessory to a breach of trust had a dishonest state of mind (so that he was subjectively dishonest in the R v Ghosh sense); or whether it should be sufficient to establish that he acted with the requisite knowledge (so that his conduct was objectively dishonest). This question is at large for us, and we are free to resolve it either way.

  127. I would resolve it by adopting the objective approach. I would do so because:

    (1) consciousness of wrongdoing is an aspect of mens rea and an appropriate condition of criminal liability: it is not an appropriate condition of civil liability. This generally results from negligent or intentional conduct. For the purpose of civil liability, it should not be necessary that the defendant realised that his conduct was dishonest; it should be sufficient that it constituted intentional wrongdoing.

    (2).The objective test is in accordance with Lord Selborne's statement in Barnes v Addy LR 9 Ch App 244 and traditional doctrine. This taught that a person who knowingly participates in the misdirection of money is liable to compensate the injured party. While negligence is not a sufficient condition of liability, intentional wrongdoing is. Such conduct is culpable and falls below the objective standards of honesty adopted by ordinary people.

    (3)  The claim for "knowing assistance" is the equitable counterpart of the economic torts. These are intentional torts; negligence is not sufficient and dishonesty is not necessary. Liability depends on knowledge. A requirement of subjective dishonesty introduces an unnecessary and unjustified distinction between the elements of the equitable claim and those of the tort of wrongful interference with the performance of a contract.

  128. If Mr Sims' undertaking was contractual, as Mr Leach thought it was, then Mr Leach's conduct would have been actionable as a wrongful interference with the performance of the contract. Where a third party with knowledge of a contract has dealings with the contract breaker which the third party knows will amount to a breach of contract and damage results, he commits an actionable interference with the contract: see D C Thomson & Co Ltd v Deakin [1952] Ch 646 CA, 694; Sefton v Tophams Ltd [1965] Ch 1140, where the action failed only because the plaintiff was unable to prove damage.

  129. In British Motor Trade Association v Salvadori [1949] Ch 556 the defendant bought and took delivery of a car in the knowledge that it was offered to him by the vendor in breach of its contract with its supplier. There is a close analogy with the present case. Mr Leach accepted payment from Mr Sims in the knowledge that the payment was made in breach of his undertaking to Twinsectra to retain the money in his own client account until required for the acquisition of property.

  130. In Sefton v Tophams Ltd the defendant bought land in the knowledge that the use to which it intended to put the land would put the vendor in breach of his contractual obligations to the plaintiff. Again the analogy with the present case is compelling. Mr Leach knew that by accepting the money and placing it at Mr Yardley's free disposal he would put Mr Sims in breach of his contractual undertaking that it would be used only for the purpose of acquiring property.

  131. In both cases the defendant was liable for any resulting loss. Such liability is based on the actual interference with contractual relations, not on any inducement to break them, so that it is no defence that the contract-breaker was a willing party to the breach and needed no inducement to do so. Dishonesty is not an ingredient of the tort.

  132. It would be most undesirable if we were to introduce a distinction between the equitable claim and the tort, thereby inducing the claimant to attempt to spell a contractual obligation out of a fiduciary relationship in order to avoid the need to establish that the defendant had a dishonest state of mind. It would, moreover, be strange if equity made liability depend on subjective dishonesty when in a comparable situation the common law did not. This would be a reversal of the general rule that equity demands higher standards of behaviour than the common law.

  133. If we were to reject subjective dishonesty as a requirement of civil liability in this branch of the law, the remaining question is merely a semantic one. Should we return to the traditional description of the claim as "knowing assistance", reminding ourselves that nothing less than actual knowledge is sufficient; or should we adopt Lord Nicholls' description of the claim as "dishonest assistance", reminding ourselves that the test is an objective one?

  134. For my own part, I have no difficulty in equating the knowing mishandling of money with dishonest conduct. But the introduction of dishonesty is an unnecessary distraction, and conducive to error. Many judges would be reluctant to brand a professional man as dishonest where he was unaware that honest people would consider his conduct to be so. If the condition of liability is intentional wrongdoing and not conscious dishonesty as understood in the criminal courts, I think that we should return to the traditional description of this head of equitable liability as arising from "knowing assistance".

    Knowledge

  135. The question here is whether it is sufficient that the accessory should have actual knowledge of the facts which created the trust, or must he also have appreciated that they did so? It is obviously not necessary that he should know the details of the trust or the identity of the beneficiary. It is sufficient that he knows that the money is not at the free disposal of the principal. In some circumstances it may not even be necessary that his knowledge should extend this far. It may be sufficient that he knows that he is assisting in a dishonest scheme.

  136. That is not this case, for in the absence of knowledge that his client is not entitled to receive it there is nothing intrinsically dishonest in a solicitor paying money to him. But I am satisfied that knowledge of the arrangements which constitute the trust is sufficient; it is not necessary that the defendant should appreciate that they do so. Of course, if they do not create a trust, then he will not be liable for having assisted in a breach of trust. But he takes the risk that they do.

  137. The gravamen of the charge against the principal is not that he has broken his word, but that having been entrusted with the control of a fund with limited powers of disposal he has betrayed the confidence placed in him by disposing of the money in an unauthorised manner. The gravamen of the charge against the accessory is not that he is handling stolen property, but that he is assisting a person who has been entrusted with the control of a fund to dispose of the fund in an unauthorised manner. He should be liable if he knows of the arrangements by which that 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 which he knows is unauthorised. I do not believe that the man in the street would have any doubt that such conduct was culpable.

    The findings below

  138. Mr Leach's pleaded case was that he parted with the money in the belief, no doubt engendered by Mr Yardley's assurances, that it would be applied in the acquisition of property. But he made no attempt to support this in his evidence. It was probably impossible to do so, since he was acting for Mr Yardley in the acquisition of the three properties which had been identified to him on 23 December, and must have known that some of the payments he was making were not required for their acquisition. In his evidence he made it clear that he regarded the money as held by him to Mr Yardley's order, and that there was no obligation on his part to see that the terms of the arrangements between Twinsectra and Mr Sims were observed. That was Mr Sims' responsibility, not his.

  139. The judge found that Mr Leach was not dishonest. But he also found as follows:

      "He was clearly aware of [the terms of the undertaking]. Indeed, his pleaded defence asserts … that he believed their 'substance ... to be that the advance would be applied in the acquisition of property' and that he had received them on the footing that they would be so applied. Yet, in evidence, he frankly admitted that he had regarded the money as held simply to the order of Mr Yardley, without restriction. Again, I have to conclude that he simply shut his eyes to the problems. As far as he was concerned, it was a matter solely for Mr Sims to satisfy himself whether he could release the money to Mr Yardley's account."

  140. The Court of Appeal thought that the judge's two conclusions (i) that Mr Leach was not dishonest and (ii) that he "simply shut his eyes to the problems" (or, as he put it later in his judgment "deliberately shut his eyes to the implications") were inconsistent. They attempted to reconcile the two findings by saying that the judge had overlooked the possibility of wilful blindness. Potter LJ put it in these terms [1999] Lloyd's Rep 438, 465, para 108:

      "Mr Leach clearly appreciated (indeed he recorded) that an undertaking in the form proposed created difficulties for Mr Sims (as Mr Sims himself recognised) yet, as from that point … [he] deliberately closed his eyes to those difficulties in the sense that he treated them as a problem simply for Mr Sims and not for himself or his client."

    Conclusion

  141. I do not think that this was a case of wilful blindness, or that the judge overlooked the possibility of imputed knowledge. There was no need to impute knowledge to Mr Leach, for there was no relevant fact of which he was unaware. He did not shut his eyes to any fact in case he might learn the truth. He knew of the terms of the undertaking, that the money was not to be at Mr Yardley's free disposal. He knew (i) that Mr Sims was not entitled to pay the money over to him (Mr Leach), and was only prepared to do so against confirmation that it was proposed to apply the money for the acquisition of property; and (ii) that it could not be paid to Mr Yardley except for the acquisition of property. There were no enquiries which Mr Leach needed to make to satisfy himself that the money could properly be put at Mr Yardley's free disposal. He knew it could not. The only thing that he did not know was that the terms of the undertaking created a trust, still less a trust in favour of Twinsectra. He believed that Mr Sims' obligations to Twinsectra sounded in contract only. That was not an unreasonable belief; certainly not a dishonest one; though if true it would not have absolved him from liability.

  142. Yet from the very first moment that he received the money he treated it as held to Mr Yardley's order and at Mr Yardley's free disposition. He did not shut his eyes to the facts, but to "the implications", that is to say the impropriety of putting the money at Mr Yardley's disposal. His explanation was that this was Mr Sims' problem, not his.

  143. Mr Leach knew that Twinsectra had entrusted the money to Mr Sims with only limited authority to dispose of it; that Twinsectra trusted Mr Sims to ensure that the money was not used except for the acquisition of property; that Mr Sims had betrayed the confidence placed in him by paying the money to him (Mr Leach) without seeing to its further application; and that by putting it at Mr Yardley's free disposal he took the risk that the money would be applied for an unauthorised purpose and place Mr Sims in breach of his undertaking. But all that was Mr Sims' responsibility.

  144. In my opinion this is enough to make Mr Leach civilly liable as an accessory (i) for the tort of wrongful interference with the performance of Mr Sims' contractual obligations if this had been pleaded and the undertaking was contractual as well as fiduciary; and (ii) for assisting in a breach of trust. It is unnecessary to consider whether Mr Leach realised that honest people would regard his conduct as dishonest. His knowledge that he was assisting Mr Sims to default in his undertaking to Twinsectra is sufficient.

    Knowing receipt

  145. Each of the sums which Mr Leach received for his own benefit was paid in respect of an acquisition of property, and as such was a proper disbursement. He thus received trust property, but not in breach of trust. This was very properly conceded by counsel for Twinsectra before your Lordships.

    Conclusion

  146. I would reduce the sum for which judgment was entered by the Court of Appeal by £22,000, and subject thereto dismiss the appeal.

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