Click here to download this Case Note by Joe Docherty.
Last year, the High Court found that a partner of the Defendant firm of solicitors, Mr Daniel Broughton, had dishonestly assisted in a misappropriation of the Claimant’s funds[1]. The Court of Appeal has now overturned that decision. In doing so, it has reaffirmed the distinction between negligence and dishonesty, and clarified the requirements for “blind eye” dishonesty to be made out.
The Claim
The Claimant company had had some £7 million fraudulently misappropriated by its de jure director, Mr Jonathan England, and its de facto director, Mr Sanjiv Varma. Following the company’s collapse, its joint liquidators brought a claim against the Defendant in the hope of recovering a portion of the lost funds.
Mr Broughton had acted for Mr Varma and his son in respect of a number of conveyancing transactions. The Claimant alleged that, in the course of those transactions, Mr Broughton had dishonestly assisted in breaches of fiduciary duty by Mr England and Mr Varma.
The High Court’s Decision
In considering the test for dishonesty in the context of assistance in a breach of fiduciary duty, the Judge placed significant reliance on the Court of Appeal’s decision in Grupo Torras v Al-Sabah [2001] CLC 221. Her interpretation of that case was that the test for determining culpability in respect of “blind eye” dishonesty is whether an honest solicitor with the skills and experience of Mr Broughton would have acted in the way that he did.
The Judge also noted her understanding of the case law to be that, in order for dishonesty to be made out, the allegedly dishonest individual need not have a suspicion of any specific wrongdoing. Rather, it would be enough for them to be aware of facts that would cause an honest individual to make further inquiries, and to fail to make those inquiries without a credible reason for that failure.
The Judge found that Mr Broughton had been aware of the steps that an honest and diligent solicitor should have taken, yet he repeatedly failed to take such steps. In particular, he failed to complete anti-money laundering checks, and to confirm / make inquiries into the source of funds for transactions. His persistent disregard for his obligations as a solicitor, and repeated turning of a blind eye to obvious causes for concern, was dishonest.
In addition, the Judge found that Mr Broughton was actively dishonest in certain respects. In particular, in his dealings with the lender in the course of one of the relevant transactions, he incorrectly confirmed that no third party was contributing funds towards the purchase, which he must have known was untrue.
Having found that Mr Broughton had not only repeatedly turned a blind eye to obvious causes of concern, but was also actively dishonest in some instances, the Defendant was held liable for dishonestly assisting in a misappropriation of the Claimant’s funds.
The Appeal
The Court of Appeal held that the Judge had approached the issue of dishonesty in the wrong way. Giving the only substantive judgment, Falk LJ held that the Judge had erroneously compressed the test for dishonesty into one stage, namely whether an honest solicitor with the skills and experience of Mr Broughton would have acted in the way that he did. In fact, the two-stage test established in Ivey v Genting Casinos (UK) Ltd (trading as Crockfords Club) [2017] UKSC 6 must be applied. The two stages are:
Furthermore, applying Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2003] UKHL 1, two requirements must be met to establish blind-eye knowledge:
These are subjective requirements. As to (1), the suspicion must be firmly grounded and targeted on specific facts. As to (2), the deliberate decision not to ask questions must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. Untargeted or speculative suspicions are insufficient (Stanford International Bank Ltd v HSBC Bank plc [2021] EWCA Civ 535).
The Judge’s approach, which it was considered had been affected by a misunderstanding of Grupo Torras, was therefore wrong, and risked conflating dishonesty and negligence. Mr Broughton’s failures to take steps that he knew a diligent solicitor would take could not support a conclusion of dishonesty in circumstances where he had no targeted suspicion and he had not chosen not to enquire for fear of confirming any suspicion. In the absence of the requisite state of mind on the part of Mr Broughton, the findings as to dishonesty could not stand.
Comment
Firms of solicitors may take some comfort from the restatement of the bright line between negligence and dishonesty, which will make it considerably more difficult for dishonest assistance claims of this kind to succeed. Nevertheless, it remains essential for firms to have in place anti-money laundering policies, and to ensure that those policies (alongside the relevant Law Society guidance) are adhered to: whether or not dishonesty can be established, failures in compliance continue to present serious litigation, regulatory and reputational risks.
Joe Docherty
Hailsham Chambers
This Case Note is available to download as a PDF below.
[1] [2025] EWHC 2362 (Ch)
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