15 January 2008

Requirements for pleading and proving intentional wrongdoing


Facts of the Case

The judgment of Mr Justice Lewison in the High Court on 3 July 2007 is a lesson in how not to litigate.  19 out of 100 paragraphs were devoted to considering whether the claimants had the locus standi to bring their claim under s212 of the Insolvency Act 1986.  By a narrow margin, the court found that it was more probable than not that at the date when Southill Finance Ltd (Southill) was wound up on 6 January 2005, the third claimant, Sedgemere Estate plc, was a creditor and that the first and second claimants were the assignees of Sedgemere’s claims and therefore entitled to pursue their claims against the first defendant (their claims against the second defendant having been compromised).

So, the first defendant Mr Broad, a director of Southill – if he had misapplied or retained or become accountable for any money or other property of the company or been guilty of any misfeasance or was in breach of any fiduciary or other duty in relation to the company – could be examined by the court and compelled by the court to repay, restore or account for that money or property or to contribute a sum to the company’s assets by way of compensation for misfeasance or breach of fiduciary duty.

But, unless the claim against Mr Broad was based on fraud, it would be statute barred, as s212 of the Insolvency Act does not create a new offence.  Not surprisingly therefore, the case opened by Mr Brockman, counsel for the claimants, was for fraudulent breach of trust.  The benefit of Mr Brockman was dispensed with by the claimants after the first 2 days of the trial and thereafter the second claimant, Mr Goodman, presented the claimants’ case.

Mr Justice Lewison applied the test of dishonesty as explained by the Privy Council in Barlow Clowes v Eurotrust International Ltd [2006] 1 All ER 333, finding that on this basis the claimants had to establish that Mr Broad:

i. acted in a way that was contrary to normally acceptable standards of honest conduct;

ii. was conscious of or deliberately turned a blind eye to those elements of the transaction in question that made his participation fall below those standards.

The Decision

Six separate claims against Mr Broad were considered.  Each one failed either due to a lack of evidence or inadequate pleadings or both.  This included a claim in respect of a transfer of property – Numbers 18 and 20 Mill Road – from Southill to Mr Broad and Mr Mullarkey on 31 May 1989 for £135,000 in respect of which the court found that £85,000 was still owed to Southill in early 1994 and that this debt to Southill remained outstanding at the date of trial. 

In deciding against the claimants, Mr Justice Lewison carefully limited the scope of the claimants’ claim to their pleaded case and reviewed the authorities and requirements for successfully pleading and proving intentional wrongdoing.

Points of Interest

Firstly, referring to Paragon Finance Plc v DB Thakerar & Co [1999] 1 All ER 400 (Paragon Finance) Mr Justice Lewison adopted the passage of Lord Justice Millett’s judgment in which he held that allegations of intentional wrongdoing (pleadings which alleged fraud, conspiracy to defraud, fraudulent breach of trust or intentional breach of fiduciary duty) and unintentional wrongdoing gave rise to distinct causes of action.

Secondly, he relied upon LJ Millett’s judgment in Armitage v Nurse [1997] 3 WLR 1046 which approved LJ Buckley’s clarification that while an allegation of dishonesty must be clearly pleaded, it was not necessary that the words ‘fraud’ or ‘dishonesty’ were used; that the facts alleged may sufficiently demonstrate that dishonesty is involved but where the facts are complicated this may not be so clear and in such a case “it is incumbent upon the pleadings to make it clear when dishonesty is alleged.”  LJ Millett in that case usefully added that “In order to allege fraud it is not sufficient to sprinkle a pleading with words like ‘wilfully’ and ‘recklessly’ (but not ‘fraudulently’ or ‘dishonestly’).  This may still leave it in doubt whether the words are being used in a technical sense or merely to give colour by way of pejorative emphasis to the complaint”.

Thirdly, Mr Justice Lewison relied upon LJ Millett’s criticisms of pleadings in Paragon Finance which included the helpful elucidation that “an allegation that the defendant ‘knew or ought to have known’ is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud even if the court is satisfied that there was actual knowledge.  An allegation that the defendant had actual knowledge of the existence of a fraud perpetrated by others and failed to disclose the fact to the victim is consistent with an inadvertent failure to make disclosure and is not a charge of fraud.  It will not support a finding of fraud even if the court is satisfied that the failure to disclose was deliberate and dishonest.”

Finally, Mr Justice Lewison reviewed the standard of proof in cases of fraud.  While accepting that the standard of proof of fraud in civil cases was ‘that of the balance of probabilities’ he relied upon the pragmatic way in which this was explained by Lord Nicholls of Birkenhead in Re H and Others (Minors) [1996] AC 563 “The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not.  When assessing the probabilities, the court will have in mind as a factor … that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability…[T]his does not mean that where a serious allegation is in issue the standard of proof required is higher.  It means only that … [t]he more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established.”

Category: Article