Twinsectra Ltd v Yardley

Facts

Twinsectra Ltd sued an entrepreneur, Mr Yardley, and two solicitors, Mr Sims and Mr Paul Leach (of Godalming), for failing to repay a £1m loan. Twinsectra Ltd had given £1m to Mr Sims to pass onto Mr Yardley as a loan for buying real estate near Apperley Bridge, Bradford. Twinsectra Ltd had said it would only give the loan if someone guaranteed Mr Yardley's repayment. Mr Yardley's solicitor, Mr Leach, refused to give the guarantee, but Mr Sims accepted. Mr Sims had owed £1.5m to Mr Yardley from previous dealings. They agreed that if Mr Sims took the loan into his account first, the prior debts would be considered repaid. Mr Sims promised Twinsectra Ltd to not release the money unless the loan conditions were satisfied. The clause read as follows.

However, Mr Sims then gave the money to Mr Yardley’s solicitor anyway, Mr Leach, who passed it onto Mr Yardley. Instead of using the money for the investment, Mr Yardley, in breach of contract used £357,720.11 to pay off some of his debts. Twinsectra Ltd sued Mr Yardley to get the money back and also both solicitors. Mr Sims was now bankrupt. It argued the money was bound by a trust, that Mr Sims was in breach of trust, and Mr Leach dishonestly assisted the breach.

The trial judge found that Mr Leach was not dishonest because he honestly believed that the undertaking did not run with the money. However, he made a contradictory finding that Leach had deliberately shut his eyes. In the Court of Appeal, Potter LJ held that Mr Leach was in fact dishonest, precisely because he had deliberately shut his eyes. A presumption in the transferor’s favour can only be made where there is no evidence that there was an intention to create a trust, or make a gift, or make a loan of the property to the transferee.

Judgment

The House of Lords all held the loan from Twinsectra Ltd was held on trust by the solicitors. Lord Slynn, Lord Steyn, Lord Hoffmann and Lord Hutton held that the money was held on express trust, created through the terms of the agreement between Twinsectra Ltd and Mr Sims. It then held (controversially, an issue revisited in Barlow Clowes Ltd v Eurotrust Ltd) that Mr Leach had not been dishonest enough for accessory liability. It was necessary for Mr Leach to have realised that he had been acting dishonestly. Lord Millett dissented. He firstly held that the nature of the trust, by which the solicitors held Twinsectra Ltd's loan money was a resulting trust, with a power to apply the money in accordance with the loan contract's terms. He viewed this to be the proper characterisation of this and all Quistclose trusts. He then would have held that Mr Leach was dishonest enough.

Lord Slynn and Lord Steyn gave two short opinions, agreeing with Lord Hoffmann and Lord Hutton.

Lord Hoffmann said the following.

Lord Hoffmann then said that the defendant must be conscious of the fact that he was "transgressing ordinary standards of honest behaviour" in order to be liable for dishonest assistance. He rejected Lord Millett's dissenting judgment on the ground it departed from Royal Brunei.

Lord Hutton's judgment considered three possible tests in the area of accessory liability: a purely subjective test, a purely objective test and a "combined test". He interpreted Lord Nicholls in Royal Brunei Airlines v Tan to have articulated a combined test: for a person to be held liable as an accessory to a breach of trust, he had to have acted dishonestly by the ordinary standards of reasonable and honest people and have been himself aware that by those standards he was acting dishonestly. He rejected the purely subjective test outright, and rejected the purely objective test as his Lordship regarded a finding by a judge that a defendant has been dishonest as a grave finding, particularly against a professional man. Therefore, he considered it "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". Lord Hutton rejected Lord Millett's dissenting judgment as his Lordship considered Lord Millett to have adopted a purely objective test.

Lord Millett's dissent maintained that Royal Brunei decided that the test of dishonesty is largely objective, although 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. 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. His Lordship gave 3 reasons for this:

By applying the Royal Brunei test, Lord Millett held that Leach was dishonest.

Significance

Lord Millett's analysis of the Quistclose trust closely mirrored the same approach he had suggested twenty years earlier in an article in the Law Quarterly Review. He suggested there are four possible answers to the question of the nature of a Quistclose trust. The beneficial interest could lie with (1) the lender, (2) the borrower, (3) an ultimate purpose, and (4) no-one, in the sense that the beneficial interest remains "in suspense". The beneficial interest could not remain in suspense, a purpose trust would be void under English law, and if the borrower held the beneficial interest the remaining money could not go back to the lender. So, Lord Millett concluded that the beneficial interest must remain with the lender, until the purpose for which the funds are lent is fulfilled on "resulting trust". By contrast, Lord Hoffmann characterised the trust as being an express, rather than a resulting trust. Although there may not have been words used to this effect, the solicitor's undertaking that the money should only be used for one purpose so that the money is not at the borrower's free disposal, was sufficient intent to create a trust.