Nolan and others v Minerva Trust Company and others  JRC078A is a recent Royal Court decision in which victims of a substantial fraud succeeded in a “dishonest assistance” claim against a Jersey trust company. The trust company had provided directors to a number of Jersey companies which were beneficially owned by a fraudster. The Court found that the trust company’s officers had, on the instructions of the fraudster, dishonestly made payments out of the companies when they were on notice that those payments could be fraudulent. Minerva was ordered to compensate the victims for their losses.
The dishonesty proved against the trust company was not of the straightforward kind, in which the defendant is fully aware of and complicit in the fraud. Rather the Court concluded that Minerva’s officers failed to act as an honest person in their position would have done, when faced with evidence that something improper was afoot. They helped the fraudster by doing what he, as their client, requested. They could have believed that what they were doing was acceptable and honest by their own standards, or by their industry’s standards, but the law takes its own objective view of what is honest.
The case reminds us that unswerving loyalty to a client’s instructions can have catastrophic legal, financial and reputational consequences. The court found that Minerva dishonestly assisted the breach of trust by the Buchanan’s companies in a number of ways, including lying at GW’s request and making the payments for GW’s benefit. Minerva was ordered to pay sums totalling £4.5m plus €8.4m to the victims.
The Plaintiffs, the Nolans, are a wealthy Irish family. They made their money through road haulage. They were duped by an Irish businessman, Gerard Walsh (“GW”), into advancing millions of pounds and euros to a number of Jersey-incorporated private investment companies. The companies were collectively described as the “Buchanan group”. They were all beneficially owned by GW.
GW was a fraudster. He falsely claimed that the money would be used to make a variety of investments in opportunities he had identified. In reality the money was transferred out of the Buchanan companies and spent as GW saw fit, including paying off his overdrafts and financing his family’s expensive lifestyle. Such shares as the Nolans acquired were worthless.
The trust company involved was called PTCL. PTCL was bought by Minerva during the relevant period, so it will be referred to here as Minerva. The Court found that, acting as Buchanan company directors, Minerva did whatever GW instructed them to do. They made payments out as instructed by GW. They asked no questions. They followed GW’s instructions not to contact the Nolans. In some instances they edited accounting documents at his request.
The Court confirmed that the essential requirements to prove dishonest assistance in a breach of trust were:
a. The existence of a trust in the plaintiffs’ favour
b. A breach of that trust
c. That the defendant assisted in that breach
d. That in giving that assistance the defendant acted dishonestly.
In order to be able to make a dishonest assistance finding against Minerva the Court first had to find that there was a trust, in favour of the Nolans, over the monies they had paid to the Buchanan companies. There was no express trust in the formal sense. However the Court ruled that the facts in this case could give rise to¬ either of two types of constructive trust. A court can declare the existence of a constructive trust over funds that have been stolen or misapplied. The effect is that a person who obtains funds through wrongdoing does not beneficially own those funds but holds them on trust for the victim, and is legally obliged to give them back or pay compensation. Any person who dishonestly assists in the breach of trust can also be ordered to compensate the victim.
In this case the Court held that because of lies told by GW, and the way he spent the Nolans’ money, the Buchanan companies were constructive trustees of the funds paid to them by the Nolans. The Court applied two different types of constructive trust: they are called Halley trusts and Quistclose trusts, named after the English cases which first applied them.
A Halley trust arises where funds are paid over as a result of a fraudulent promise, and the payer gets nothing in return for it. An example might be, as in this case, a claim that the money will be used to invest in German hospitals, when GW knew he owned no German hospitals, had no means of getting any, and had no intention of getting any. It was just a lie to get people to part with money, little different from theft.
A Quistclose trust arises when money is paid over on the agreed understanding that it is to be used for a specific purpose only, such that if it cannot be used for the agreed purpose then it must be returned. If the money is used for a different purpose then that is a breach of trust.
The Court held that breach of trust would occur either:
a. as soon as GW’s companies failed to repay the money at once (for a Halley trust), or
b. as soon as the funds were applied for a purpose other than that agreed (for a Quistclosetrust).
The assistance in this case was provided by Minerva, as manager of GW’s companies, in carrying out the payments GW instructed them to make, from funds received from the Nolans. Each payment was in effect the breach of trust, so the payments clearly assisted in the breaches. The key issue was dishonesty.
The Court approved English judgments stating that the view of the defendant, as to whether what they were doing was dishonest, is irrelevant. What counts is the objective view of the Court as to what are “ordinary standards of honest behaviour.”
The Court confirmed that dishonesty can therefore apply not just to the obvious cases where a defendant knew that trust assets were being misapplied, or where he closed his eyes and ears to the obvious and deliberately failed to ask questions to avoid learning something he did not want to know. It can go beyond that, to include taking risks when aware of a doubt as to the legitimacy of what he is being asked to do:
“Acting in reckless disregard of others’ rights or possible rights can be a tell-tale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries.
The circumstances will dictate which one or more of the possible courses should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. 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.”
The Court held that:
“… an exaggerated notion of dutiful service to clients, which produced a warped moral approach that it was not improper to treat carrying out clients’ instructions as being all important …”
is dishonest, regardless of whether the person involved genuinely believed it was honest.
The Court took into account the Jersey regulatory framework in which Minerva was operating. The Financial Services (Trust Company Business (Assets – Customer Money)) (Jersey) Order 2000 provides that trust assets held by regulated trustees such as Minerva must not be paid to another customer without proper authority. The Proceeds of Crime (Jersey) Law 1999 creates offences of money laundering for assisting another to retain the proceeds of his own criminal conduct, eg by transferring it, and requires trust companies to have robust procedures to check where money has come from. The Court held that these provisions were part of the relevant circumstances when considering honesty.
The Court took the approach that knowledge gained by Minerva’s officers on one occasion informed Minerva’s state of mind in a subsequent transaction. So each instruction could not be viewed in isolation but as part of a growing body of evidence that should have put Minerva’s officers on alert.
Minerva argued that it never had actual knowledge of any trusts that might have come into existence as a result of GW’s conduct, and did not know facts that would put an honest man on notice. It did not know what GW had said to the Nolans or what purposes had been agreed for the funds. Minerva said it was entitled to assume GW was honest. It said payments to GW’s personal benefit did not attract concern because he was the beneficial owner of the companies. However none of this mattered in the Court’s view because Minerva knew enough to know something was not right.
The Court rejected evidence from Minerva officers that they had given careful consideration to the pros and cons of each of GW’s requests to transfer funds. In respect of one witness it found that his attitude was that “what was reasonable or the right thing to do was what Mr Walsh said — no more and no less. Similarly he never gave any thought as to whether a given transaction proposed by Mr Walsh … was bona fide and honest or otherwise.” It also found that that two Minerva witnesses were prepared to lie to third parties on GW’s behalf.
The Court examined all the transactions, and made findings in each case on Minerva’s state of knowledge and the legal consequences. In summary it found that:
a. Each of the payments from the Nolans to the Buchanan companies gave rise to either aHalley trust or a Quistclose trust, which was breached in each case.
b. In almost every case the assistance provided by Minerva, by paying sums away at GW’s instruction, was “commercially unacceptable” and was dishonest. Minerva’s liability derived from the acts and knowledge of various Minerva staff at various levels; the criticism was not limited to those at director level.
c. In each case that was found to be dishonest there were circumstances which would have led an honest trust officer to appreciate that something was not right, and to seek further information from the Nolans or from GW before making the payment concerned.
d. In some cases there were obvious inconsistencies between things GW was telling Minerva about where money was coming from or what it was for. There were also inconsistencies between what GW told Minerva and other facts known to Minerva. The Court held that an honest trust officer faced with such inconsistencies would recognise that they were being lied to, would treat all statements from GW with caution, would alert all relevant Minerva staff to their concerns, and would not make payments without investigating fully, including where appropriate making contact with the Nolans to ensure what lay behind the investment.
e. Minerva officers persisted in their dishonesty after GW’s fraud was first alleged, by making untrue statements to the Nolans in person and in correspondence, and swearing untrue affidavits in English proceedings, seeking to buy time for GW to raise further funds, and to cover up what had happened.
The Court concluded that the limitation period for dishonest assistance claims in Jersey is three years, not ten as the Nolans argued. Thus claims must be brought within three years.
However another issue arose: when does the limitation period start to run? In Jersey customary law the period does not run while the plaintiff is incapable of bringing a claim. This is the doctrine of empêchement de fait. It may apply to a plaintiff who is unaware of the facts that would enable him to claim. Time will not start to run while it is reasonable for that plaintiff to remain ignorant of the relevant facts and matters.
In this case the Court held that it was not until Minerva provided disclosure of its files to the Nolans, in compliance with a court order, that the nature of Minerva’s role and knowledge became clear to the Nolans. No claim could have been brought until then because it would have been professionally improper for the Nolans’ lawyers to allege dishonesty until they had strong enough evidence to do so. Thus the claim was not out of time.
The outcome of this case should encourage plaintiffs to seek wide disclosure orders against service providers who are connected to an alleged fraud and who are likely to have relevant documents. Disclosure could assist not only with a claim against the fraudster but also potentially, if the material merits it, a dishonest assistance claim against the service providers themselves.
Trust companies in offshore finance centres like Jersey are regulated. They are most unlikely to disobey or frustrate disclosure orders from a Jersey Court. Such conduct could very quickly put them out of business once the regulator got wind of it. Thus, perhaps paradoxically, offshore professional trustees and directors may be easier targets for disclosure orders, and consequent dishonest assistance claims, than their less-regulated counterparts who operate in onshore jurisdictions.
Each case will differ according to its facts, and ultimately the question will be how an honest person would act. But the findings in this case point to some of the things a Court expects of a trust company when the facts before it, objectively, give cause to suspect wrongdoing. Some of them should not really need to be said:
a. Do not be a puppet for your client. As a trustee or director you should exercise your own independent judgment.
b. Be alert, and be sceptical. If something does not seem right, it may not be – and you should look into it.
c. An example is when an asset bought for one price is to be sold for, or valued at, a very different price. Credible commercial explanations are required, to displace the suspicion that someone is being deceived or prejudiced.
d. A request to redact or amend documents, or to record something in an inaccurate or non-standard way, may also justify alarm bells. An explanation must be requested, and provided. Failure to provide a good explanation should be noted as a ground for concern, even if the request is then withdrawn.
e. Do not rely on the fact that your client has no known blots on his reputation. Not every fraudster has been convicted before.
f. If you are given an explanation (regarding, for example, source of funds or the reason for a payment out) that is inconsistent with an earlier explanation, or with other facts known to you, then that is unacceptable.
g. Once you have a concern that anything improper might be happening, any payments must be embargoed while it is investigated. The embargo should only be lifted if, on investigation, the concerns turn out to be unfounded.
h. If the client refuses to provide explanations, persist until he gives one.
i. If you receive an explanation in response to your requests, subject that explanation to rigorous scrutiny. Does it really explain everything satisfactorily? Are there further checks that could and should be made to back it up? Do not just accept anything you are told.
j. Once you know your client has lied to you, you should thereafter regard everything he says with caution, and require independent verification. This may require seeking direct confirmation from those whose money is at risk, that they are aware of what you have been asked to do.
k. If you are discouraged from talking to those people, then that is in itself a cause for serious concern.
l. Anything giving cause for concern should be recorded prominently on file and should be reported promptly to all others who work on the matter.
m. All those working on a client’s affairs should be aware of the client’s history, so they can put any developments into context.
It may appear that the Court has effectively required offshore financial service providers to assume their clients are fraudsters unless they can demonstrate otherwise. It is not quite that, but any realistic and honest trust company employee must surely acknowledge that there are still people who seek to use their services for improper purposes. They are a minority of the clients, but they will always exist.
Having robust anti-money laundering procedures in place is simply not enough to avoid unwelcome fallout from administering such people’s entities. There is the real risk of the losers, people who are not your clients at all, suing you.
It may be sensible in cases of this sort to adopt a presumption, even when only the slightest cause for concern raises its head, that your client is up to no good – and to require proof to the contrary before continuing the relationship. This will not be easy when the client is insisting on payments being made yesterday, threatening to take his business elsewhere, being unpleasant on the phone etc. But the alternative could be a lot worse.