Falk: Judge misunderstood test
The Court of Appeal has overturned a ruling that a solicitor “dishonestly assisted” in misappropriating a company’s funds.
Lady Justice Falk held that Deputy High Court Judge Saira Salimi applied the wrong test in determining last year that Daniel Broughton, a partner at London firm Portner & Co – now part of Judge & Priestley – had turned a ‘blind eye’ to money laundering issues.
She dismissed the claim brought by Grosvenor Property Developments Ltd (GPDL), saying it would “unfair” to remit the case for rehearing. The findings pointed to negligence rather than dishonesty.
GPDL had been established with the apparent purpose of acquiring and converting a former hotel building in Bristol into student accommodation. It raised funds from investors but went into liquidation before taking steps to acquire the building, following the fraudulent misappropriation of £7m by its sole de jure director, Jonathan England, and its de facto director, Sanjiv Varma.
Portner & Co was instructed to act by Mr Varma and his son (who was not involved in the fraud) in relation to a series of property transactions.
The law firm accepted that £2.4m of monies beneficially belonging to GPDL, or their traceable proceeds, were paid into its client account and used in three transactions.
GPDL’s liquidators claimed that Portner & Co, through Mr Broughton, dishonestly assisted in breaches of fiduciary duty by the former directors.
There was no suggestion that Mr Broughton had actual knowledge of the underlying fraudulent misappropriation of money.
The question before the court was whether he dishonestly assisted in Mr Varma and Mr England’s breaches of duty. Judge Salimi decided that he had.
However, Falk LJ said the judge had misunderstood the case law when stating that the legal test to apply was whether an honest solicitor with the skills and experience of Mr Broughton would have acted in the way that he did.
This wrongly compressed the mandatory two-stage approach to determining dishonesty – the first being subjective and the second objective – into one.
The two stages are first to ascertain the individual’s relevant knowledge and beliefs – his actual state of mind – and then determine whether, given that state of mind, their conduct was honest or dishonest by applying the standards of ordinary decent people.
The judge also failed to follow the law on establishing ‘blind eye’ knowledge, according to the unanimous ruling.
This requires first the existence of a suspicion that certain facts may exist and second a deliberate decision to avoid taking steps that would confirm their existence.
Falk LJ said these errors of law justified allowing the appeal and setting aside the judge’s decision. The court then had then to decide whether to dismiss the claim or remit it for a new hearing.
The “most striking feature” of Judge Salimi’s decision was she accepted the firm’s case that Mr Broughton genuinely believed the Varmas were “legitimately” wealthy and understood that Mr Varma was proposing to fund his son’s property development ambitions.
“Mr Broughton was not found to have had any suspicion that anyone outside the single family unit had a legitimate claim to the funds or a reason to object to a decision by the sole directors and shareholders to deploy the funds as proposed.
“Similarly, while Mr Broughton understood that Siddhant Varma was being funded by his father, he had no suspicions about whether Mr Varma was genuinely entitled to his apparent wealth. And the provision of funds by a parent to a child is of course entirely commonplace.”
Falk LJ noted that it was not put to Mr Broughton in cross-examination that he was lying. “Instead, throughout the judgment… the judge applied the test of ‘what an honest solicitor would have done’, having express regard to the professional framework within which Mr Broughton worked.
“As already discussed, there are clear indications of the judge applying standards of diligence rather than honesty…
“The judge might very well have considered that what Mr Broughton did was ‘incredible’ (in its usual sense of extraordinary), but that is not the same as concluding that he was telling the lender a deliberate untruth or paying funds away because he actually had a suspicion about their ultimate source and chose not to make enquiries to avoid the risk of confirming it.”
There was also “no finding anywhere” that Mr Broughton made a conscious decision not to ask further questions for fear of what he might find out.
Falk LJ said Mr Broughton was “knowingly cutting corners with clients generally. But a failure to take steps that he knew that a diligent solicitor would take cannot support a conclusion of dishonesty without a targeted suspicion and a choice not to enquire for fear of confirming it”.
GPDL’s case was not put on the basis of any targeted suspicion and Falk LJ said it would be “unfair to permit GPDL to have another go at securing findings that it failed to secure from the judge”.
She added: “Finally, I should make clear that nothing in this judgment should be taken to condone lax behaviour, whether by conveyancing solicitors or any other professionals.
“However, there is a critical distinction between negligent behaviour, even in its grossest form where it is known that standards are not being met or are being ignored, and dishonesty.
“In this case the findings were consistent with negligence, and the requirements of blind-eye knowledge were not met.”
The court allowed the appeal and dismissed the claim.
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