Liability for knowing involvement in breaches of equitable duties
383 A third party (a 'stranger') who becomes involved with fiduciaries who breach their duty to their principal may also be liable to the principal, as a constructive trustee. In Barnes v Addy (1874) LR 9 Ch App 244, 251-2, Lord Selborne LC said:
'[The responsibility of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found ... actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But ... strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps, of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. ... If those principles were disregarded, I know not how anyone could, in transactions admitting of doubt as to which view a Court of Equity might take of them, safely discharge the office of solicitor, of banker, or of agent of any sort to a trustee. But, on the other hand, if persons dealing honestly as agents are at liberty to rely on the legal power of the trustees, and are not to have the character of trustees constructively imposed upon them, then the transactions of mankind can safely be carried through; and I apprehend those who create trusts do not expressly intend, in the absence of fraud and dishonesty, to exonerate such agents of all classes from the responsibilities which are expressly incumbent, by reason of the fiduciary relation, upon the trustees.'
384 The principles of that case apply where a stranger becomes involved in a breach of duty by a fiduciary who is not an express trustee: Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373. I have referred to the 'second limb' of Barnes v Addy. That expression is commonly used to refer to the category of liability of someone who has not received trust property but has become involved with knowledge in a dishonest and fraudulent design. The first limb of Lord Selborne's formulation is concerned with 'the liability of a person as a recipient of trust property or its traceable proceeds'; while the second limb 'is concerned with what, for want of a better compendious description, can be called the liability of an accessory to a trustee's breach of trust': Royal Brunei Airlines v Tan [1995] 2 AC 379, 382. Although Lord Selborne's formulation has been described as a 'straitjacket' that has been interpreted as if it were a statute, inimically to analysis of the underlying concept (Royal Brunei Airlines, at 386), the Barnes v Addy apothegm still usefully describes the general territory of third party liability for breach of fiduciary duty.
385 Lord Selborne referred to an agent who 'assists' in a dishonest and fraudulent design. But if a stranger can be said to have procured or knowingly induced the fiduciary's wrongdoing, the case against the stranger is even stronger: see Royal Brunei Airlines, at 384; and note generally C Harpum, 'The Stranger as Constructive Trustee', (1986) 102 LQR 114, 141. The assistance or procurement or inducement must relate to 'a dishonest and fraudulent design on the part of the trustees [or other fiduciaries]'. The meaning of these words was considered by the Privy Council in the Royal Brunei Airlines case.
386 In that case the airline appointed a company called Borneo Leisure Travel ('BLT') to act as its general travel agent in Borneo for the sale of passenger and cargo transportation, by a written contract signed on behalf of BLT by Mr Tan. BLT was required by the contract to hold money received for the sale of passenger and cargo transportation in trust for the airline, and pay that money to the airline within 30 days. In practice, the money received by BLT was paid into its general account rather than any separate bank account. Mr Tan and his wife were the directors of BLT and its sole shareholders, and the company was effectively controlled by Mr Tan. BLT failed to pay the airline as required by the contract, and the airline terminated the contract and took proceedings against Mr Tan to recover the unpaid money. The trial judge found Mr Tan liable under the accessory limb of Barnes v Addy, since he authorised the wrongful use, for ordinary business purposes, of money that he knew to be subject to an express trust in favour of the airline. It was not necessary, according to the judge, to show that Mr Tan had personally gained from the breach of trust. The Court of Appeal of Brunei Darussalam allowed Mr Tan's appeal on the ground that, although there had been a sorry tale of mismanagement and broken promises, it had not been established that BLT was guilty of fraud or dishonesty in relation to the amounts it held in trust for the airline. Consequently there was no 'dishonest and fraudulent design'.
387 The Privy Council reversed the Court of Appeal's decision, holding that it was not necessary for the breach of trust to be a dishonest and fraudulent breach by the trustee, but it was necessary to show dishonesty on the part of the accessory. The principle adopted by their Lordships was that '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' (at 392). Mr Tan was liable to the airline because he caused or permitted his company to apply money collected in trust for the airline in a way he knew was not authorised by the trust of which the company was trustee (at 393). He used the airline's money to relieve cash flow problems, treating it as a rolling 30-day credit. That was sufficient to render his conduct dishonest, even though he hoped to be able to repay the money. It was not necessary to establish that he intended to defraud the airline.
388 Their Lordships made some pertinent observations on the meaning of 'dishonesty', as follows (p 389-90):
'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 dishonestly are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be acquainted with conscious impropriety. However, the 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. And 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.'
389 Their Lordships applied these observations to the area of commercial risk-taking. They observed (at 389) that all investment involves risk, and that 'imprudence is not dishonesty, although imprudence may be carried recklessly to lengths which call into question the honesty of the person making the decision', this being especially so if the transaction serves another purpose in which that person has an interest of his own. They referred to 'commercially unacceptable conduct' and added (at 390) that 'acting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty', concluding (at 391) that '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'.
390 As to the relevance of the personal characteristics of the third party, their Lordships said (at 391):
'... 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 the personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did'.
391 Finally, I should note their Lordships' discussion as to whether mere negligence is sufficient to generate accessory liability. As I read their advice, the question for their Lordships was whether the accessory owes a common law duty of care to the beneficiaries, the assumption apparently being that equitable liability is confined to cases where the accessory's conduct is dishonest. In most cases, in their Lordships' opinion, no such duty of care will be owed.
392 Although various Australian courts have applied the Royal Brunei Airlines case (for example, Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1; Humphris v Jenshol (1997) 160 ALR 107; Duke Group Ltd v Pilmer (1999) 73 SASR 64), the High Court of Australia has not yet had the opportunity to consider it. However, in my opinion those principles are generally consistent with the High Court's judgment in the Consul Development case. Indeed, the Privy Council in Royal Brunei Airlines treated the Consul Development case as broadly in line with the dishonesty test which their Lordships enunciated (at 388). The singular contribution of the Royal Brunei Airlines case to the development of law is that their Lordships treat the accessory's liability as dependent on dishonesty rather than knowledge, and therefore consign to legal history the numerous cases that had identified increasingly refined sub-categories of actual and constructive knowledge. The High Court did not take that step in Consul Development, but by adopting a narrow view of 'knowledge', the practical effect of which is similar to a test of dishonesty, they paved the way for that step to be taken. It is therefore clear, in my opinion, that the Royal Brunei Airlines case is a statement of the modern Australian law.
393 I have dealt with the Royal Brunei Airlines case extensively because, in my opinion, it is a case of particular importance with respect to the position of Mr Gledhill. In the further amended statement of claim, the plaintiffs seek to invoke the principles of accessory liability under Barnes v Addy with respect to the breaches by Messrs Mullins and Rees of their fiduciary duties as directors of Aequitas and Aequitas No 1. They contend that Mr Gledhill dishonestly procured or assisted in those breaches. It is clear, first, that Mr Gledhill did not procure or induce or assist the breach of fiduciary duty which arose when Mr Mullins failed to disclose his interest in the $69,400 commission to the board of directors of Aequitas No 1. He had no actual knowledge that disclosure had taken place, and it could not be said that his connection or relationship with Aequitas No.1 was such that he ought to have known that there had been no disclosure: Companies (NSW) Code, s 68A(4). He was therefore entitled to assume that the constitution of the company had been complied with, and that Mr Mullens as a director had properly performed his duty to the company: ss 68A(3)(a) and (f). As to that breach of duty, the question of dishonesty does not even arise.
394 I have also found that Messrs Mullins and Rees breached their fiduciary duty as directors of Aequitas and Aequitas No 1 by virtue of their overall conduct during the period from November 1985 to March/April 1986. My findings on this point disclose a substantial level of involvement by Mr Gledhill. The seed of the problem leading to the breach of duty by Messrs Mullins and Rees was Mr Gledhill's plan to develop an equity investment business for AEFC, through the establishment of a joint venture corporate advisory business and a publicly listed vehicle to which AEFC's short-term equity investment could be sold. Whether the idea was conceived by Mr Gledhill or someone else, it was clearly developed by him very actively, in his board paper of 2 September 1985 and subsequently. Mr Gledhill's plan was inherently defective, because inevitable irretrievable conflicts of interest were built into it. One of those inevitable conflicts arose out of the position in which Messrs Mullins and Rees were placed, working for the corporate advisory business of the joint venture, becoming involved in directorships of target companies such as the companies of the Rendell group, providing corporate advice to Aequitas, and in all of these activities seeking to secure their future welfare by producing handsome profits for AEFC.
395 My analysis of the facts demonstrates that Messrs Mullins and Rees, influenced by their desire to produce profits by AEFC, took an over-optimistic view of the potential position of the Rendell group during this whole period, failed to make proper disclosure of the Rendell group's difficulties to the Aequitas companies, failed adequately to protect those companies, and failed to make proper disclosure of relevant matters in the private placement memorandum. The consequence was that the Aequitas companies did not receive an independent judgment to which they were entitled.
396 It is undeniable, in my view, that Mr Gledhill induced, assisted and (to a degree) procured these breaches of duty. As I have said, the breaches flowed from structural deficiencies in Mr Gledhill's own plan for the expansion of the business of AEFC, a plan which he actively promoted and implemented. He was well aware of the position in which Messrs Mullins and Rees were placed, and he took no steps to ensure that the independent directors and potential investors in Aequitas were fully informed of all the facts and circumstances. On the contrary, he contributed an open letter to the misleading private placement memorandum.
397 The more difficult question is whether Mr Gledhill's conduct was 'dishonest' in the relevant sense. Mr Gledhill knew all the facts that constituted the breaches of fiduciary duty by Messrs Mullins and Rees as a result of their overall conduct during the period from November 1985 to March/April 1986. But I do not believe that, in developing his plan for AEFC to make equity investments, and in contributing his letter to the private placement memorandum, he intended to deceive anyone.
398 A plan involving such obvious conflicts of interest was improvident, but it was not developed to serve an ulterior purpose of conferring a personal interest on Mr Gledhill, who would benefit from the success of the plan only in his capacity as general manager of AEFC. However, in my view Mr Gledhill's plan showed a kind of moral obtuseness, in disregard for the rights of potential investors in Aequitas. Its structure ensured that the interests of those investors would be subordinated to AEFC's desire to make short-term profits. Though Mr Gledhill believed that the Rendell Industries shares were not overpriced, he knew that their valuation depended on assumptions that had not been independently verified and were increasingly open to question.
399 However, looking at the circumstances objectively but taking into account Mr Gledhill's characteristics as a observed in the witness box, I do not regard him as having acted dishonestly. His was an abject failure to act prudently and with due diligence, a but it was not so reckless as to be tantamount to dishonesty. His conduct may have rendered him liable to his company for want of care (it is not for me to decide that question), but it di not render him an accessory to the breaches of fiduciary duty of others.
400 I turn now to consider whether Mr Gledhill has accessory liability in respect of other breaches of fiduciary duty. I have found that AEFC (as well as AEFCAS and CASO) was in breach of the fiduciary duty of a corporate or financial adviser, and that AEFC and AEFC Leasing (as well as AEFCAS and CASO) were in breach of the fiduciary duty of promoters. But I have taken the view that Mr Gledhill did not personally occupy a fiduciary position, even though his conduct and omissions were amongst the facts which gave rise to the fiduciary duties of AEFC and AEFC Leasing and their breach. Those findings raise for consideration the question whether Mr Gledhill is liable as an accessory to those breaches of fiduciary duty.
401 In my opinion the inevitable result of my findings is that Mr Gledhill procured or induced the breach by AEFC of its fiduciary duty as a corporate or financial adviser, as a principal in the joint venture. But he did not do so dishonestly. My reasoning with respect to Mr Gledhill's accessory liability for breach of directors' duty is equally applicable here. He was in a position to ensure that the private place memorandum was not misleading, although he was not directly responsible for or involved in drafting it. Had he done so, AEFC would have avoided liability for breach of its fiduciary duty. But his failure to intervene to correct and perfect the document was a failure to act prudently or carefully, rather than a failure to act honestly. While there were grounds for serious concern about the Rendell group's future solvency, the evidence does not indicate that he in fact held those concerns and deliberately suppressed them. He appears to have believed, though without any solid foundation, that the price paid by Aequitas No.1 for the Rendell Industries shares was fair, and that the group would overcome its financial difficulties.
402 Mr Gledhill also procured or induced the breaches of fiduciary duty by AEFC and AEFC Leasing. His conduct was an important ingredient in the circumstances leading these companies to be promoters. Again, he was not dishonest, although his conduct was highly improvident.
403 Although the plaintiffs were given ample opportunities to amend the statement of claim, their pleading of Mr Gledhill's accessory liability was, until the end, limited to accessory liability for breach of the fiduciary duty of Messrs Mullins and Rees as directors. I have nevertheless considered whether Mr Gledhill has accessory liability with respect to the breaches of the fiduciary duties of AEFC as corporate adviser and promoter, and of AEFC Leasing has promoter. As it happens, I have regarded it as open to me to find against Mr Gledhill on these matters, although in the end I have not done so. In Gray v New Augarita Porcupine Mines [1952] 3 DLR 1, the pleadings alleged fraud in the sense of deceit or misrepresentation, rather than breach of fiduciary duty. But the Privy Council took the view that enough was said in the statement of claim to show that special reliance was intended to be placed upon the defendant's obligations as a director and upon his breaches of fiduciary duty, and consequently a claim based on 'equitable fraud' was open on the pleadings. Their Lordships said (at 13-14) that 'what matters is that a defendant should have had adequate warning by the pleadings as to the issues of fact that are to be raised against him ...'. In my opinion, the further amended statement of claim gave Mr Gledhill ample warning of the issues of fact in this case. The question of his potential accessory liability, with respect to the breaches of fiduciary duty by AEFC and AEFC Leasing, does not raise any new issues of fact, especially given that the pleadings alleged that Mr Gledhill was a primary fiduciary along with AEFC and AEFC Leasing.
404 The accessory liability of AEFC and AEFC Leasing also depends upon establishing that they have been dishonest. Although Mr Gledhill was not the directing mind and will of those companies, he was their primary agent in all relevant matters. I have found that he was not dishonest. It follows that neither of the companies was dishonest, and consequently they have no accessory liability for the breaches of directors' duty by Messrs Mullins and Rees. But I have found them to be liable as primary fiduciaries.