A third party who assists in a dishonest or fraudulent scheme involving a breach of trust or a breach of duty is liable to find themselves on the receiving end of considerable judicial disapproval.
You have just sat down to a long-delayed lunch and your wine glass is appropriately full. With something approximating wine wankerism, you take in the heady perfumes of the wine and the questioning looks from your lunch companions as a prelude to tasting the wine. That is until your phone rings. It is your favourite client. You look at your wine and then your phone. You look wistfully at your wine one last time before taking the call. Your favourite client in a state of some agitation…
“I just had one of those [expletive deleted] process servers hand me some court documents. I’ve just skimmed them. There are some very large numbers in this document. Some of my [expletive deleted] business colleagues must be crooked as a dog’s hind leg. Help…???”
A short while later, lunch but a distant memory, you are sitting in a conference room with your favourite client. Your gen-y colleague is looking as toey as a Roman sandal at the prospect of a Friday afternoon conference. Your client, oblivious to the gastronomic inconvenience, begins:
“I had invested some money in a building project with some loose business connections. Given my general finance background, those connections suggested that I should manage the finance side of this investment. They gave me the title ‘investment director’. Trouble is that from what I can gather my colleagues also obtained some money from overseas for a separate project, and they may have used some of that foreign money in the building project. I was aware that money came into the project and was then paid out to related companies. I was shown invoices at the time, but now these overseas people are saying it was their money that was dispersed in breach of trust and that I provided ‘knowing assistance’. What the [expletive deleted] is knowing assistance?”
You sit back in your chair and outline the quaint 19th century case of Barnes v Addy. Just as you are hitting your stride the client butts in impatiently: “Yes, yes, but how does this effect me?” You explain that the learned Judge came up with two concepts; knowing receipt of trust property, or the ‘first limb’, and knowing assistance, or the ‘second limb’. In respect of the second limb, the High Court has stated that a defendant will be liable if he or she knowinglyassists a trustee or fiduciary with a dishonest and fraudulent design.
“So” the client beams, “I’m only in the gun if I have knowledge of a dishonest and what did you call it?” Fraudulent design you respond. “On the part of my business colleagues” the client finishes. Yes you say. “But, that is clear as mud” says the client. “What on earth is a dishonest and fraudulent design and what constitutes knowledge – I saw invoices remember?”
Your favourite client has come to the nub of the problem. Firstly, you clarify that a dishonest and fraudulent design does not necessarily require conscious dishonesty, but must equate to more than a trivial breach of trust or fiduciary duty. “That sounds like a bit of a low bar” the client snorts. You agree tactfully with the client before pointing out that knowledge, or lack thereof, becomes all important. Your client leans back as you explain that knowledge has been divided into five distinct categories with the first four being recognised in Australia:
- actual knowledge
- wilfully shutting one’s eyes to the obvious
- wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make
- knowledge of circumstances which would indicate the facts to an honest and reasonable person
- knowledge of circumstances which would put an honest and reasonable person on inquiry
“But, I saw invoices…” your client trails off adopting a type of Sargent Schultz defence. Your gen-y colleague appears ready to cross-examine the client about knowledge, but your favourite client gets in first and asks if an adverse finding could result in a large judgment.
At this point you pause and look at your gen-y colleague, who is avoiding your gaze by focusing on the firm embossed noted pad. You say to the client that the High Court in the case of Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited had delivered some recent guidance on this very point. “The Ancient Order of what? Was this case about old cars or arborists?” your client demands. Naughty employees, you suggest, as you explain how two employees of Lifeplan presented a proposal, prepared using Lifeplan’s confidential information, to the Ancient Order of Foresters with a view to stealing business away from Lifeplan. The board of the Ancient Order of Foresters considered and eventually approved the plan. The Lifeplan employees resigned and were subsequently employed by the Ancient Order of Foresters, who in turn saw their revenue increase from $1.6m to $24m two years later. Somewhat unsurprisingly, Lifeplan commenced legal action against its former employees and eventually joined the Ancient Order of Foresters for knowing assistance.
“So what happened?” the client asks keenly. You pause briefly before advising that the two employees were found to have breached their duties to Lifeplan and that the Ancient Order of Foresters was found to have knowingly assisted in these breaches. The interesting aspect of the High Court’s decision was the nature of the remedy ultimately ordered by the High Court. Rather than an account of profits of the Ancient Order of Foresters for the period of the 5-year plan (prepared by the two employees and approved by the board) which amounted to $6,558,495, the High Court, by majority, held that the account of profits ought properly reflect the entire net present value of the Ancient Order of Foresters business. This sum amounted to $14,838,063 and was, you explain to your by now gobsmacked favourite client, an astonishing outcome.
In short, the High Court took an expansive view of the benefit derived by the Ancient Order of Foresters. There was a clear link between the knowing assistance and the benefits derived by the Ancient Order of Foresters, and the corresponding decrease in the profitability of Lifeplan. The High Court, by any measure, you explain to your favourite client, was sending a very clear warning to third parties who assist in dishonest and fraudulent schemes involving a breach of duty. And you emphasise to your favourite client, that depending on the nature of the knowing assistance and the causal significance to the losses suffered, financial exposure of the party accused of knowing assistance could be significant.
“So, aside from the numbers in these court documents, you can’t tell me how much I could really be up for, but it could be a lot.” Yes that’s the substance of it; if you are found to have provided knowing assistance in breach of trust or a duty owed, depending on the circumstances of the case, a court now has considerable latitude to order compensation in favour of a successful plaintiff.
 (1874) LR 9 Ch App 244
 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 
The Bell Group Ltd (In Liq) v Westpac Banking Corporation [No 9] (2008) 225 FLR 1, 551
 Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l’Industrie en France SA  4 All ER 161, 235, 242-3
  HCA 43
Ben has considerable experience in the areas of commercial litigation and dispute resolution.