Knowing receipt, piercing the corporate veil and dishonestly assisting in a breach of trust

When can you claim knowing receipt?  When is it possible to pierce the corporate veil and how do you establish a claim for dishonestly assisting in a breach of trust?  This case considered all these claims. 

A law firm committed a fraud by collecting in 27 mortgage advances totalling £5,779,1666 from lenders none of which was applied in completion of transactions for which the advance had been made.  The Law Society intervened in the law firm’s practice and ascertained that £450,150 was paid out of its client account to a company, Habitable Concepts Ltd (“Habitable”) whose sole shareholder and director was Mr Onuiri.   

As the law firm paid out of its client account in breach of trust, the Law Society had the right to recover this money.  The Law Society made various claims against Habitable and Mr Onuiri for the return of this money. Although Habitable and Mr Onuiri served a defence, they did not appear at a trial, but it was still for the Law Society to prove its case.

The Law Society claimed for knowing receipt.  In order to establish a claim for knowing receipt, the Law Society had to prove: 

• that the receipt by Habitable was beneficial; and
• that Habitable received the payment with the requisite knowledge.

 As no direct evidence of these matters was available, the court had to assess what inferences might be properly drawn from the proved facts.

The court held that the inherently implausible nature of Habitable’s pleaded case was such to cry out for testing by cross-examination and in the absence of this, the Judge was prepared to accept the Law Society’s case.  Accordingly, Habitable knowingly received money by the law firm in breach of trust and must account as constructive trustee for the money received and the Law Society could trace into the proceeds of the payment.

Although the Law Society submitted that it could pierce the corporate veil, the court disagreed.  It needed to be proved that receipt by Habitable was a façade or device to facilitate or conceal receipt by Mr Onuiri.  Although the whole arrangement seemed deeply suspect, suspicion is not a substitute for proof. 

The court, however, held that although Mr Onuiri did not receive property in breach of trust, he nonetheless dishonestly assisted in a breach of trust.  It had to be established that Mr Onuiri’s knowledge about the payment by the law firm had to be such as to render his participation contrary to normal and acceptable standards of honest conduct.  This involved looking at his state of knowledge and then measuring his conduct in the light of that knowledge by reference to the objective standards of honest conduct. The court noted that:

•  Mr Onuiri had provided Habitable’s banking details to the law firm.
• He knew that the money was not at the free disposal of the law firm.
• He knew there was no commercial relationship between the law firm and Habitable.
• He received no explanation as to the reason for the payment.
• He made no enquiry as to the reason for the payment.
• He chose to deal with the payment for the benefit of Habitable.

The proper inference was that he was assisting the law firm to dispose of money which did not belong to it in an unauthorised manner.

This case is interesting as it confirms that where a defence has been filed, but the defendant does not appear at trial, it is still for the claimant to prove its case.  It also highlights the requirements necessary to establish a claim for knowing receipt, when it is possible to pierce the corporate veil and the necessary ingredients to establish a claim for dishonestly assisting in a breach of trust.

The Law Society of England and Wales v Habitable Concepts Limited and Mr Onuiri [2010] EWCH 1449