LIABILITY OF STRANGERS

A person who is not a trustee himself (usually referred to as a 'stranger' to a trust) can be
liable in person for a breach of trust. In other word, liability of strangers is a personal liability
of who are not express trustees. A person intermeddling the property of the trust can be
considered a trustee de son tort. A Trustee de son Tort is one type of constructive trustee, and
owes the same duties as an express trustee and bears the same liability. Historically,
strangers liability has been divided into the categories, which are 'knowing receipt' and
'knowing assistance'. Knowing receipt applies when the defendant who receives trust
property are aware of the trust attached to him or, when the trust property is received, treats it
in a manner contrary to the trust. Knowing assistance arises when the third party does not
actually obtain or manage the property but knowingly assists the trustee in committing a
breach of trust.

In the case of Barnes v Addy [1874]1, stranger of a trust will normally not be liable unless
"those agents receive and become liable for any part of the trust property" (i.e. knowledge
receipt) or "unless they assist the trustees with knowledge in a dishonest and fraudulent
manner" (i.e. dishonest assistance).

a) Accessory Liability: Knowing dishonest assistance

The general rule is that a stranger who assists a trustee in committing a breach of trust
through fraud and dishonesty can be personally liable to compensate the beneficiaries of the
trust for any damages incurred by the breach. Although the stranger does not hold any
property to trust, in a sense that he is only a constructive trustee, the stranger is personally
liable to compensate the trust’s beneficiary for the damage incurred by the breach of trust.
This means that the compensation must be coming from his own personal property. The
stranger’s liability to compensate the beneficiaries is effectively just the same as an express
trustee’s liability.

In Eaves v Hickson [1861]2, a trust was created for the benefit of the children of a
father, who actually could not benefit from the trust because they were illegitimate as they
were born out of wedlock. The father forged a marriage certificate so that the children could

1
[1874] LR 9 Ch App 244
2
[1861] 30 Beav 136
enjoy the benefits of the trust. The father was then held to be personally liable for the loss,
and the children had to pay back the money which has been wrongfully received.

In order to test for the accessory liability, four essential requirements have been
suggested by Peter Gibson J in the case of Baden v Société Générale pour Favoriser le
Developpement du Commerce et de l'Industrie en France [1983] 3. The elements that need to
be established in the category of ‘knowing assistance’ are (i) the existence of trust; (ii) the
existence of dishonesty and fraud on the part of the trustee of the trust; (iii) the assistance by
the stranger in the dishonest and fraudulent design of the trustee; and lastly (iv) the
knowledge of the stranger.

On the part of the mental state of the stranger, ie: what types of knowledge are
relevant in constructive trusteeship, Peter Gibson J in the same case4 laid down five different
mental states which are: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious;
(iii) wilful reckless failure to make such inquiries as an honest and reasonable man would
take; (iv) knowledge of circumstances which could indicates the fact to an honest and
reasonable man; and (v) knowledge of circumstances which would put an honest and
reasonable man on inquiry. By having either one of these mental states is enough for the
court to impute knowledge of the facts to the alleged constructive trustee.

One of the leading case of dishonest assistance is the case of Royal Brunei Airlines
Sdn Bhd v Tan [1995]5. The fact of this case is the plaintiff (Royal Brunei Airlines) has
appointed Borneo Leisure Travel Sdn Bhd (the company) as its agent for passenger flights
bookings around Sabah and Sarawak as well as for cargo transport. Mr Tan (the defendant)
was the managing director and main shareholder of the company. The company was getting
money for Royal Brunei to keep on trust in a separate account until it was handed over. But
hoewever the company instead paid money into its current account with the knowledge and
assistance of Mr Tan, and used it for its own business. The company then failed to payback
the money in time upon termination of the contract, and the company went insolvent. So the
plaintiff claimed the money back from Mr Tan. Although Mr Tan was a stranger to the trust,
he had dishonestly assisted in taking money out from the trust account. The issue in this case
is whether Mr Tan is personally liable as a constructive trustee? The Court held Mr Tan was
liable to Royal Brunei as a constructive trustee. The case was then brought on appeal, and

3
[1983] BCLC 325
4
[1983] BCLC 325
5
[1995] UKPC 4
oddly on appeal, Brunei Darussalam's Court of Appeal held that the company was not guilty
of fraud or dishonesty and thus Mr Tan should not be personally. However the appeal was
then put before the Privy Council where the Privy Council ruled in favour of the claimant,
reversing the Court of Appeal's ruling. Dishonesty of the trustee itself was unnecessary, and
Mr Tan was personally liable for dishonestly assisting in the breach of trust.

This case of Royal Brunei Airlines6 also has set up the objective standard for
dishonest assistance. Lord Nicholls on this case advice that what matters is the dishonest
assistance’s state of mind. According to Lord Nicholls, ‘knowingly’ was better to be avoided
as a defining element of the principle, because knowledge depends on a ‘gradually darkening
spectrum’. The test to be liable in assisting breach of trust must therefore rely on dishonesty
which is objective. It is meaningless what the state of mind of the primary trustee is, if the
assistor is dishonest in himself. If the defendant did not act in the manner in which an honest
person should have acted under such situations, then the defendant is considered dishonest.
For example, acting under utter disregard to the rights of others or future rights of others can
be regarded as dishonesty. Lord Nicholls also added that an honest person would normally
refuse to be involved, ask further questions, insist on obtaining further advice, or anything
else.

A subjective test for dishonest assistance were then introduced in the subsequent case
of Twinsectra Ltd v Yardley [2002]7. In this case, the plaintiff, Twinsectra Ltd had given £1m
to their attorney, Mr Sims to pass onto Mr Yardley (the defendant), an entrepreneur, as a loan
for buying real estate. Mr Sims gave the money anyway to Mr Yardley's attorney (Mr Leach),
who then passed it on to Mr Yardley. In breach of contract, Mr Yardley, instead of using the
money for the investment, used £ 357,720.11 to pay back some of his debts. Mr Yardley
could not return the loan, and Twinsectra tried to recover its loss. So, Twinsectra Ltd brought
an action against Mr Yardley, and two solicitors, Mr Sims and Mr Paul Leach, for failure to
repay a loan of £1m. However, the terms of the agreement were very peculiar because of the
fact that the solicitors were acting for both the lender and the creditor. The agreement's
purpose had been unclear as there was no provision in the agreement to prohibit Yardley
from using the money on any other reason until it had acquired the property in compliance
with the agreement. The issue in this case was if the solicitor was dishonest by having the
knowledge of the transaction's legal implications. It was held by the House of Lords that

6
[1995] UKPC 4
7
[2002] UKHL 12
Yardley's solicitor holds the loan from Twinsectra Ltd on trust. The fact that the undertaking
was unusual does not mean it was invalid because of uncertainty. The money was deposited
in the solicitors’ company account which ought to have remained the money of Twinsectra
until the proposed acquisition of the property was rendered in compliance with their
arrangement. In regards of dishonesty, Lord Hoffman appeared to introduce the subjective
test and came to the conclusion that his actions may have been wrong and misguided but not
dishonest, and so the argument against him failed. The evaluation needed to be objective and
subjective in equal measure. It requires objectively dishonest behaviour and also that the
defendant acknowledges that most reasonable people will find his actions to be dishonest.

Lord Hoffman was in view that there was no necessity to include different tests of
dishonesty in civil and criminal cases. This decision needed to reinterpret Royal Brunei
Airlines v Tan [1983]8 which indicated in establishing liability for dishonest assistance, not a
purely objective dishonesty test is to be used, but a measure close to the criminal honesty
measure carried out in Ghosh [1982]9. Purely objective test is insufficient to pose liability, it
needed subjective element as well which is dishonest in the eyes of ordinary reasonable men
and self-awareness that what you are doing is dishonest in the eyes of ordinary reasonable
men.

The decision of Privy Council in the case of Barlow Clowes International Ltd v
Eurotrust International Ltd [2006]10 has ended the debate on which approach is to be used in
establishing strangers liability for dishonest assistance. In this case, Barlow Clowes
International Ltd (the appellant company) appealed against a decision that the second
respondent was not liable for dishonestly assisting the appellant company misappropriating
the funds invested in a fraudulent offshore investment scheme. The fact of the case was
Barlow Clowes International Ltd took £140m of money from investors, and paid it to an
offshore financial service company where Mr Henwood (the second respondent) was the
director. After the exposure of its fraudulent securities scheme, the appellant company,
Barlow Clowes International Ltd was in liquidation. Barlow Clowes' liquidator then argued
that Mr Henwood had dishonestly assisted in the dissipation of capital from the creditors. In
separate proceedings, the deemster held that Mr Henwood to be liable for dishonestly
assisting the misappropriation of funds. However on appeal, the Court of Appeal ruled that

8
[1983] BCLC 325
9
[1982] 3 WLR 110
10
[2006] 1 All ER 333
Mr Henwood was not dishonest, and no evidence could have proved out from the deemster as
her ignorance and her inferences in Mr Henwood's oral testimony were not enough.

When the case11 was brought to Privy Council, Lord Hoffmann held that Mr Henwood
was found liable by, and the deemster had rightly interpreted the rules of liability from
Twinsectra’s case12 for dishonest assistance. She had claimed that Mr Henwood believed that
the money was misappropriated, and that a person could know and believe that money was
misappropriated and therefore be liable without knowing that the money was held on trust or
even knowing what a trust was. Mr Henwood did not make inquiries although he had been
informed of the misappropriation of money by Barlow Clowes’ director. In concluding that
this was the result of a deliberate and dishonest decision, the deemster was completely
justified, hence the deemster's decision has been restored. The Privy Council applied the
dishonesty test and argued that if any of the following mental states could be shown, which
are: (i) if the assistant is conscious that the transaction is one in which he can not participate
honestly; and (ii) if the assistant is suspicious of the crime and takes a conscious decision that
no further inquiry should be made. It was proven that Mr Henwood’s conduct was
contradictory to the standards of honesty and therefore he was both subjectively and
objectively dishonest. This case adopts a double test of the subjective and objective
dishonesty standard. Lord Hoffman claims the test is the same as Royal Brunei Airlines’13
which is objective but with a slight amount of subjectivity.

As for local law, the Malaysian court applies the objective test with slight subjectivity
in determining the standard of dishonesty. This can be seen in the case of Kuan Pek Seng @
Alan Kuan v Robert Doran [2013] 14, where the Court of Appeal confirms that Malaysia
adopts the objective test as explained by the Privy Council in Barlow Clowes15. The general
rule is that there breach of trust is committed by someone other than defendant; the defendant
must have assisted the person in the breach; and the defendant must have a dishonest state of
mind.

11
Barlow Clowes International Ltd v Eurotrust International Ltd [2006]
12
[2002] UKHL 12
13
Royal Brunei Airlines Sdn Bhd v Tan [1995]
14
[2013] 2 MLJ 174
15
Barlow Clowes International Ltd v Eurotrust International Ltd [2006]