In Nolan v. Minerva Trust & Others [2014] JRC 078A, the Royal Court delivered a salutary reminder of the high standards by which professional service providers in Jersey will be judged, and the need for scrutiny, careful reflection and demonstrable independence when taking investment decisions.

It also underlined the need to be robust, whatever pressure may be exerted, if there are (or should be) questions about the propriety of a transaction.

Background

1. The factual matrix underlying the claim was complex, relating to eight investment transactions that took place between 2005 and 2006.

2. The Plaintiffs, members of the Nolan family, alleged that they had been fraudulently induced to enter the investment transactions by an individual named Gerard Walsh.

3. They alleged that this behaviour amounted to breaches of trust.

4. They further alleged that the Defendants, including Minerva (via a predecessor company, PTCL, with whom they had merged and, therefore, assumed liability for), had dishonestly assisted in these breaches of trust by complying with Mr Walsh’s instructions to pay money away inappropriately as part of the transactions.

5. PTCL provided corporate administration services to Mr Walsh’s companies, known as the Buchanan Group.

6. Essentially, the Buchanan Group was involved in raising money, identifying investment opportunities, and holding and selling assets.

Dishonest Assistance

First principles

1. The Royal Court confirmed a number of principles relevant to dishonest assistance, which repay study in the context of trusteeship.

2. In order to succeed in their claims, the Nolans had to establish:

1. the existence of a trust in their favour;
2. a breach of that trust;
3. that PTCL assisted in that breach of trust; and
4. that in rendering that assistance PTCL acted dishonestly.
5. The existence of a trust and breaches
6. The nature of the relationship between Mr Walsh, the Buchanan Group companies and the Nolans, and the nature of the eight investment transactions, potentially gave rise to two types of implied trust:

3. a “Halley” trust, which is a type of constructive trust arising where there is a “contract or deal which itself is a vehicle to defraud”.

1. There will be a breach of such a trust where there is a failure to disgorge the trust assets immediately [footnote 1];

4. a “Quistclose” trust, which is a type of resulting trust arising where money is advanced to a person exclusively for a specific purpose (so that it does not form part of the person’s own general property).

1. The trust subsists until the underlying mandate is fulfilled, and is breached if it is applied for other purposes [footnote 2].

5. Of the eight transactions in question, the Royal Court concluded that

1. six gave rise to breaches of “Quistclose” trusts,
2. one gave rise to a breach of a “Halley” trust and
3. one amounted to a breach of both.

6. In essence, money was paid away by the Buchanan Group companies in a manner that was inconsistent with the nature of the investment transactions as represented by Mr Walsh to the Nolans (and on which basis the Nolan’s were induced to invest).

Assistance in that breach of trust

1. In providing corporate administration services to the Buchanan Group companies, and in effecting the disbursement of monies in a manner that was inconsistent with Nolans’ legitimate expectations, PTCL had assisted in the breaches of trust.
2. The salient question was whether it has done so dishonestly.

Dishonesty

1. The Royal Court confirmed a number of key principles, relevant in the context of professional service providers:

2. honesty is judged by objective standards:

1. “[H]onesty is not an optional scale, with higher or lower standards according to the moral standards of each individual” [footnote 3];
2. an honest person does not act recklessly:
3. “[N]or does an honest person deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless” [footnote 4];

3. honesty requires careful judgement where matters are not straightforward:

i. “[A]n honest person would have regard to the circumstances known to him, including

1. the nature and importance of the proposed transaction,
2. the nature and importance of his role,
3. the ordinary course of business,
4. the degree of doubt,
5. the practicality of the trustee or the third party proceeding otherwise and
6. the seriousness of the adverse consequences to the beneficiaries”;

4. circumstances will dictate the honest course of action. This includes:

1. declining to act;
2. asking further questions; and/or
3. seeking professional advice;

5. account must be taken of an individual’s

1. experience,
2. intelligence and
3. state of knowledge.

6. However, “it is not necessary that he should actually have appreciated that he was acting dishonestly; it is sufficient that he was”[footnote 5];

7. knowledge is judged cumulatively.

8. If an honest trust officer would have made enquiries in relation to a prior transaction, which would then have influenced his/her actions in a later transaction, the two transactions are to be seen as a “continuum”.

9. In the context of professional service providers, the Royal Court accepted that a person’s breach of his/her regulatory obligations and duties formed part of the relevant circumstances in determining whether there had been dishonest behaviour. The Royal Court reminded itself that in such situations a trustee’s obligations included:

1. to safeguard, protect and properly segregate and identify trust assets (per Article 21of the Financial Services (Jersey) Law 1998);
2. to keep adequate records of customer money, so that the money can be identified, traced and reconciled (per Paragraph 2(1) of the Financial Services (Trust Company Business (Assets – Company Money) (Jersey) Order 2000 (the                CMO));
3. to ensure that, in any transaction, customer money is properly transferred with appropriate authority (per paragraph 6 of the CMO);
4. to conduct its business with integrity, demonstrate that reasonable care has been taken, and maintain systems and procedures to protect customer assets (per the Trust Company Business Codes of Practice);
5. to avoid any transfer of customer money where the trustee should suspect that it represents the proceeds of crime (per Articles 32 and 33 of the Proceeds of Crime (Jersey) 1999).

10. Finally, the Royal Court emphasised the dangers of acting as a puppet for someone else in a transaction.

11. This may have the effect of imputing the puppet-master’s knowledge into the puppet. The puppet would then be judged as if he/she had the same knowledge as the puppet-master:

1. “[I]f a person allows himself to be the mere nominee of, and acts for another person, he must be bound by the notice which that other person for whom he acts has of the nature of the transaction …
2. …a director acting in a transaction on the direction of a stranger is fixed with that stranger’s knowledge of the nature of the transaction” [footnote 6] .

12. This underlines the dangers of acting at the behest of a client in relation to a transaction, without independent consideration of what is being proposed.

13. A trustee who does so leaves themselves as a potential hostage to fortune regarding the client’s knowledge of the transaction.

14. In this case, due diligence at the time had revealed no inherent concerns about Mr Walsh. He had the appearance at that stage of being a successful businessman although the reality was quite different.

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