Remedies against third parties: recipient and accessory liab...

Learning Outcomes

This article explains the principles for establishing accessory liability, also known as dishonest assistance, when a third party helps facilitate a breach of trust or fiduciary duty. It covers the necessary elements that a claimant must prove and focuses particularly on the objective standard of dishonesty applied by the courts. It also clarifies what amounts to assistance, how the defendant’s knowledge is assessed, and what remedies are available (and not available) against a dishonest accessory. After reading this article, you should be able to identify the components of accessory liability and apply the relevant legal tests to SQE1-style multiple-choice questions involving third-party involvement in breaches of trust or fiduciary duties.

SQE1 Syllabus

For SQE1, you are required to understand the circumstances in which a third party may be held liable for assisting in a breach of trust or fiduciary duty, distinguishing accessory liability from recipient liability and refining the application of the dishonesty test, with a focus on the following syllabus points:

• the distinction between recipient liability (based on receiving trust property) and accessory liability (based on assisting the breach)
• the four elements required to establish accessory liability
• the objective test for dishonesty applied to the accessory's conduct
• identifying scenarios where accessory liability might arise in practice
• the role of wilful blindness and the limits of mere negligence when assessing dishonesty
• the remedial consequences of dishonest assistance (personal liability; no proprietary remedy)
• limitation considerations for claims against dishonest assistants.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. To establish accessory liability, which of the following must be proven about the third party's state of mind?
   1. They intended the beneficiaries to suffer loss.
   2. They knew they were acting dishonestly according to their own standards.
   3. They acted dishonestly according to the objective standards of ordinary decent people.
   4. They were negligent in failing to spot the breach of trust.
2. Which of the following scenarios is LEAST likely to constitute 'assistance' for accessory liability?
   1. A solicitor drafting documents known to facilitate a breach of trust.
   2. An accountant knowingly falsifying accounts to hide a breach.
   3. A bank processing a payment instruction from a trustee, unaware it relates to a breach.
   4. A financial advisor recommending an investment known to be part of a fraudulent scheme.

3. True or False: For accessory liability to be established, the breach of trust or fiduciary duty committed by the primary trustee/fiduciary must itself have been dishonest.

Introduction

When a trustee or other fiduciary breaches their obligations, causing loss to the beneficiaries or principal, the primary legal action lies against that trustee or fiduciary. However, equity also recognises that third parties ('strangers' to the trust/fiduciary relationship) can sometimes be implicated in the wrongdoing. Accessory liability, commonly referred to as 'dishonest assistance', is one ground for holding such third parties accountable. It arises where a person dishonestly assists a trustee or fiduciary to commit a breach of their duty, even if the assistant does not personally receive any trust property. This contrasts with 'knowing receipt', where liability is based on the unconscionable receipt of trust property derived from a breach. Understanding dishonest assistance is essential for identifying all potential defendants in cases of trust or fiduciary wrongdoing.

Key Term: Fiduciary Duty
A duty of utmost good faith and loyalty owed by one person (the fiduciary, eg a trustee, company director, agent) to another (the principal, eg a beneficiary, company, client), requiring the fiduciary to act solely in the principal's best interests and avoid conflicts of interest.

The Elements of Accessory Liability (Dishonest Assistance)

Accessory liability is established by proving four elements, as confirmed in cases like Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 and Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37. Modern authority treats the liability as personal; the assistant is often described as a “constructive trustee”, but that label does not confer a proprietary remedy.

1. Existence of a Trust or Fiduciary Duty

There must be a trust in existence, or a fiduciary relationship giving rise to fiduciary duties. This includes formal express trusts and duties arising from fiduciary relationships, such as those owed by company directors to the company, personal representatives to an estate, or agents to principals. The assistant need not know that a trust or fiduciary relationship exists; the existence of the duty is sufficient in law.

2. Breach of Trust or Fiduciary Duty

The trustee or fiduciary must have committed a breach of their trust or fiduciary duty. Importantly, the breach itself does not need to have been dishonest on the part of the trustee/fiduciary. An innocent or negligent breach by the trustee/fiduciary can still form the basis for accessory liability if the third party's assistance was dishonest. The breach can include acts such as unauthorised self-dealing, misapplication of trust funds, failure to comply with investment duties, improper distributions, or conflicts of interest by fiduciaries.

Key Term: Breach of Trust
Any act or omission by a trustee that is contrary to the terms of the trust instrument or the general duties imposed on trustees by law (eg the duty to act in the best interests of beneficiaries, the duty to invest prudently).

A breach is required in fact; assistance in a plan that never culminates in a breach will not generally found liability, although assistance in concealing or covering up a breach already committed can itself constitute assistance where it impedes recovery or allows the breach to be completed.

3. Assistance by the Third Party

The third party must have assisted the trustee or fiduciary in committing the breach. Assistance generally implies some active participation or involvement that furthers the breach. Merely failing to intervene is usually insufficient, unless the third party had a specific duty to act. The assistance does not need to be the sole or main cause of the breach, but it must have contributed to it in a real sense.

Examples of assistance include:

• Handling or processing payments essential to the breach (eg arranging transfers to illicit accounts).
• Drafting or executing documents necessary for the breach (eg transactions enabling unauthorised self-dealing).
• Managing or preparing accounts used to disguise the breach.
• Setting up companies or bank accounts to receive misapplied funds.
• Providing professional advice or recommendations that facilitate the breach (eg knowingly promoting a scheme dependent on misapplied trust money).
• Taking steps after an initial misapplication to hide its traces, thereby preventing recovery or helping the breach to succeed.

While courts often look for a positive act, passive assistance can suffice exceptionally, particularly where the alleged accessory has a specific duty to act (eg a partner or compliance officer who discovers an ongoing, imminent breach within their practice and deliberately remains silent so the transaction can complete).

4. Dishonesty of the Third Party

The central element is that the third party's assistance must have been dishonest. This is assessed by an objective standard that focuses on whether the conduct, in light of what the defendant knew, would be regarded as dishonest by ordinary, decent people.

Key Term: Dishonesty (in Accessory Liability)
Conduct which is dishonest according to the objective standards of ordinary, reasonable, and honest people, having regard to the specific knowledge the defendant possessed at the time.

Dishonesty does not require an intention to harm beneficiaries or a motive to gain personally. Carelessness or mere negligence is not enough. However, wilfully shutting one’s eyes to the obvious can amount to dishonesty.

Key Term: Wilful Blindness
Conscious decision to avoid confirming suspicious facts by deliberately failing to make inquiries that an honest person would make, despite awareness of clear warning signs.

Remedies against a dishonest accessory are personal: equitable compensation for the loss caused by the breach to which they provided dishonest assistance (plus interest). Because the accessory typically never receives the trust property for their own benefit, a proprietary claim (tracing or recovery of specific property) is not generally available against them.

The Objective Test for Dishonesty

English law applies an objective test to determine whether the third party's assistance was dishonest. The defendant's own subjective view of their honesty is irrelevant. The leading modern statements are Royal Brunei Airlines v Tan and Barlow Clowes v Eurotrust, which confirm that dishonesty means not acting as an honest person would in the circumstances. Courts consider all the circumstances known to the defendant, including their experience, intelligence, and the reasons they acted as they did.

The court follows a two-stage process:

1. Determine the defendant's actual state of knowledge: What did the third party actually know about the transaction and the circumstances surrounding the breach? This includes knowledge they deliberately chose to ignore (wilful blindness). It is not based on what they ought to have known (negligence is insufficient).
2. Assess the conduct objectively: Given that actual knowledge, would an ordinary, decent person regard the third party's actions (their assistance) as dishonest?

In applying this test, courts distinguish between:

• mere inadvertence, carelessness, or failure to spot red flags (not enough);
• suspicion coupled with a deliberate decision not to inquire (wilful blindness, which can suffice);
• knowledge of facts that would indicate to an honest person that their participation was enabling wrongdoing.

Courts may take into account the defendant’s role. For example, professionals such as solicitors, accountants, and bankers are expected to react to red flags in a manner consistent with honest practice, and turning a blind eye to obvious risks can be deemed dishonest once the actual knowledge is identified. However, the test remains objective, not a standard of professional negligence.

Applying the Test

If a third party knows facts which would indicate to an honest and reasonable person that they were assisting in wrongdoing, and proceeds regardless, they are likely to be found dishonest. Suspicion combined with a conscious decision not to make inquiries (wilful blindness) can also satisfy the test. Conversely, if a third party acts on a genuinely plausible explanation, takes reasonable steps to clarify concerns, and does not deliberately avoid the truth, a finding of dishonesty is unlikely.

Where dishonesty is alleged, civil courts apply the balance of probabilities but require cogent evidence commensurate with the seriousness of the allegation. A defendant’s ex post facto assertion of innocence will not assist if their conduct, viewed objectively in light of their actual knowledge at the time, falls below the standards of ordinary honest people.

Worked Example 1.1

A solicitor (S) is instructed by a trustee (T) of a family trust. T asks S to draft documents to transfer £100,000 from the trust fund to T's personal offshore bank account. T explains it is a 'loan' which the trust deed permits. S reviews the trust deed and sees that while trustees can make loans, they cannot loan funds to themselves. S points this out to T, but T insists the transaction proceed, saying it's a 'temporary arrangement' and the beneficiaries 'won't mind'. S, valuing T's business, prepares the transfer documents as instructed without further inquiry or advising T against the action. The beneficiaries later sue S for dishonest assistance when the funds are lost.

Is S likely to be found liable?

Answer:
Yes, S is likely liable.

1. Trust/Duty: A trust exists.
2. Breach: T breached the trust by making an unauthorised loan to himself.
3. Assistance: S assisted by drafting the necessary transfer documents.
4. Dishonesty: S knew the trust deed prohibited loans to trustees. S knew T intended to proceed despite this prohibition. An ordinary, honest solicitor, knowing these facts, would likely refuse to proceed or insist on T obtaining court or beneficiary approval. Proceeding despite knowing the transaction was a breach constitutes dishonest conduct by objective standards. S's motive (keeping the client) is irrelevant.

Worked Example 1.2

A bank processes an electronic transfer instruction from a trustee client to pay £50,000 to a third-party contractor. The transaction appears routine. The bank’s systems flag no sanctions or AML alerts, and there are no unusual features. The trustee later turns out to have misapplied trust funds.

Can the bank be liable for dishonest assistance?

Answer:
Unlikely on these facts. Routine processing without knowledge of wrongdoing is not dishonest. There is assistance in a factual sense, but there is no dishonesty because the bank lacked actual knowledge of suspicious facts and did not deliberately avoid inquiry. Negligence, if any, is not sufficient.

Worked Example 1.3

An accountant (A) is asked by a trustee to create a structure to move funds offshore quickly. A learns that the funds will come from a trust’s account and that the beneficiaries have objected to recent withdrawals. A suspecting “something is not right” decides not to ask for the trust deed or beneficiary consent because “the less I know, the better”, and proceeds to establish a shell company and nominee accounts to receive the money.

Is A exposed to accessory liability?

Answer:
Likely yes. A’s deliberate decision to avoid confirming suspicious facts is wilful blindness. Given A’s actual knowledge (trust funds, beneficiary objections, urgency, and secrecy), an ordinary honest person would not proceed without clarifying authority. That conduct is dishonest by the objective test.

Worked Example 1.4

A junior clerk in a law firm is told by a partner to courier signed trustee resolutions and transfer forms to a bank. The clerk is not told these relate to a breach and has no reason to suspect wrongdoing.

Could the junior clerk be personally liable for dishonest assistance?

Answer:
No on these facts. The clerk has assisted but is not dishonest: they lack actual knowledge indicating wrongdoing and did not turn a blind eye. Mere obedience to instructions without red flags is insufficient to establish dishonesty.

Worked Example 1.5

Two partners, P1 and P2, in a small firm act for a trustee. P1, who handles the file, drafts documents to transfer trust assets to the trustee’s personal account and knows the transfer is unauthorised. P2 discovers an email trail in the firm’s shared system the day before completion, realises the issue, but decides to stay silent so as not to “rock the boat”.

Is P2 potentially liable for dishonest assistance?

Answer:
Potentially yes. Although P2’s assistance is largely passive, their conscious decision not to act in circumstances where a reasonable person with their responsibilities would intervene can amount to assistance coupled with dishonesty. The silence facilitates completion of the breach in the knowledge it is unauthorised.

Worked Example 1.6

A company director owes fiduciary duties to the company. She diverts a corporate opportunity in breach of duty. A broker, aware that the opportunity belonged to the company and that the director has no board approval, helps structure the diversion for a fee.

Can the broker be liable as a dishonest assistant even though there is no express trust?

Answer:
Yes. A fiduciary relationship suffices. The director’s diversion is a breach of fiduciary duty. The broker’s active assistance, knowing the lack of authority, is likely to be judged dishonest by objective standards.

Remedies and scope

A dishonest assistant faces a personal claim in equity to make good the loss flowing from the breach they helped to facilitate, including interest from the date of breach. A proprietary claim is not appropriate against a mere assistant, as they typically did not receive or hold the trust property for their own benefit. Equitable compensation broadly mirrors the measure applicable to trustees in breach: to restore the position the trust would have been in but for the breach. The assistant is not vicariously liable for all acts of the trustee; their liability is confined to loss caused by the breach to which their dishonest assistance materially contributed.

Exam Warning

Do not confuse dishonesty for accessory liability with the concept of 'unconscionability' required for knowing receipt. While both involve assessing the defendant's knowledge, the test for dishonest assistance focuses squarely on whether the conduct was dishonest by objective standards, given that knowledge. In contrast, knowing receipt does not require dishonesty but turns on whether it is unconscionable for the recipient to retain benefits, assessed while they were in receipt.

Practical indicators of dishonesty and assistance

When evaluating the facts:

• Look for red flags known to the accessory: unusual urgency, secrecy, clear conflicts of interest, documents inconsistent with the trust/fiduciary framework, beneficiary objections, or the fiduciary demanding personal payments.
• Identify whether the accessory asked obvious questions (eg request for the trust deed or board/beneficiary approval) or instead deliberately avoided them.
• Separate negligence from wilful blindness: failure to spot subtle anomalies differs from a conscious decision not to verify obvious risks.
• Consider whether any passive inaction occurred in a context where the accessory had a duty to act (eg a professional with responsibility for oversight within a firm or a compliance role).

Limitation note

Claims against dishonest assistants are personal equitable claims. Unlike proprietary claims or actions against trustees “to recover trust property”, they are generally subject to the six-year limitation period for actions in equity, subject to postponement where the defendant has fraudulently concealed the facts. Time limits for breach of trust claims against the trustee are different and include specific exceptions; do not assume those exceptions automatically apply to accessories.

Revision Tip

When tackling a problem question on dishonest assistance, systematically apply the four elements. Pay close attention to the facts indicating what the third party actually knew or suspected. The key is often assessing whether, given that knowledge, their participation crosses the line into objectively dishonest conduct. If the facts support only negligence or inadvertence, the claim should fail.

Key Point Checklist

This article has covered the following key knowledge points:

• Accessory liability arises from assisting a breach of trust/fiduciary duty, not receiving property.
• Four elements are required: duty, breach, assistance, and third-party dishonesty.
• The trustee/fiduciary's own dishonesty is not required for accessory liability.
• Assistance usually involves active participation that furthers the breach; exceptionally, passive inaction can suffice where there is a duty to act and deliberate silence facilitates the breach.
• Dishonesty is judged objectively based on the standards of ordinary decent people, having regard to what the defendant actually knew at the time.
• Wilful blindness (consciously avoiding inquiry in the face of obvious risks) can amount to dishonesty; mere negligence is insufficient.
• The accessory’s liability is personal (equitable compensation plus interest); a proprietary claim is generally not available against a mere assistant.
• Claims against dishonest assistants are generally subject to a six-year limitation period, subject to postponement where there is fraud or concealment.
• Do not conflate dishonest assistance with knowing receipt: the former requires objective dishonesty; the latter turns on unconscionability while in receipt.

Key Terms and Concepts

• Fiduciary Duty
• Breach of Trust
• Dishonesty (in Accessory Liability)
• Wilful Blindness