'Honestly, I Had No Idea!' Unquestioning Loyalty To Your Client Can Make You Dishonest, If Your Client Is A Fraudster

This recent judgment of the Royal Court of Jersey is a wake-up call to offshore fiduciaries and corporate service providers: slavish loyalty to client requests can be a very costly mistake, if your client turns out to be a fraudster and the Court decides that you helped him when you had reason to suspect that he was up to no good. For doing his bidding you could be branded dishonest, and ordered to compensate the victims for their losses out of your own funds.

1. Nolan and others v Minerva Trust Company and others [2014] JRC078A is a recent Royal Court decision in which victims of a substantial fraud succeeded in a "dishonest assistance" claim against a Jersey trust company. The trust company had provided directors to a number of Jersey companies which were beneficially owned by a fraudster. The Court found that the trust company's officers had, on the instructions of the fraudster, dishonestly made payments out of the companies when they were on notice that those payments could be fraudulent. Minerva was ordered to compensate the victims for their losses.

2. The dishonesty proved against the trust company was not of the straightforward kind, in which the defendant is fully aware of and complicit in the fraud. Rather the Court concluded that Minerva's officers failed to act as an honest person in their position would have done, when faced with evidence that something improper was afoot. They helped the fraudster by doing what he, as their client, requested. They could have believed that what they were doing was acceptable and honest by their own standards, or by their industry's standards, but the law takes its own objective view of what is honest.

3. The case reminds us that unswerving loyalty to a client's instructions can have catastrophic legal, financial and reputational consequences. The court found that Minerva dishonestly assisted the breach of trust by the Buchanan's companies in a number of ways, including lying at GW's request and making the payments for GW's benefit. Minerva was ordered to pay sums totalling £4.5m plus €8.4m to the victims.

   BACKGROUND – THE FACTS

4. The Plaintiffs, the Nolans, are a wealthy Irish family. They made their money through road haulage. They were duped by an Irish businessman, Gerard Walsh ("GW"), into advancing millions of pounds and euros to a number of Jersey-incorporated private investment companies. The companies were collectively described as the "Buchanan group". They were all beneficially owned by GW.

5. GW was a fraudster. He falsely claimed that the money would be used to make a variety of investments in opportunities he had identified. In reality the money was transferred out of the Buchanan companies and spent as GW saw fit, including paying off his overdrafts and financing his family's expensive lifestyle. Such shares as the Nolans acquired were worthless.

6. The trust company involved was called PTCL. PTCL was bought by Minerva during the relevant period, so it will be referred to here as Minerva. The Court found that, acting as Buchanan company directors, Minerva did whatever GW instructed them to do. They made payments out as instructed by GW. They asked no questions. They followed GW's instructions not to contact the Nolans. In some instances they edited accounting documents at his request.

   THE LAW ON DISHONEST ASSISTANCE

7. The Court confirmed that the essential requirements to prove dishonest assistance in a breach of trust were:

   The existence of a trust in the plaintiffs' favour A breach of that trust That the defendant assisted in that breach That in giving that assistance the defendant acted dishonestly. CONSTRUCTIVE TRUSTS

8. In order to be able to make a dishonest assistance finding against Minerva the Court first had to find that there was a trust, in favour of the Nolans, over the monies they had paid to the Buchanan companies. There was no express trust in the formal sense. However the Court ruled that the facts in this case could give rise to¬ either of two types of constructive trust. A court can declare...