Floreat Investment Management Limited v Benjamin Churchill & Ors

For dishonesty, the fact-finder must first establish the defendant’s actual knowledge or belief as to the facts, then apply the objective standards of ordinary decent people. A belief need not be reasonable, although its reasonableness is evidence of whether it was genuinely held.

Where a payment is contractually due to an intermediary only as a conduit for onward payment, an agreed direct payment to the ultimate recipients may be a contractual short cut rather than dishonest diversion. The court must assess the whole factual picture, including the defendant’s understanding and any informed consent.

Reading Football Club made early repayments under a loan facility and paid a US$2.2 million termination fee to the Fund’s solicitors. The Fund’s investment manager, FIML, whose sole shareholder and executive director had agreed that the fee should be divided between his company and the defendants’ company, sued the defendants as assignee of the Fund’s claim.

The High Court found the defendants dishonest and ordered repayment on several alternative bases, including dishonest assistance, knowing receipt and an equitable proprietary claim. The defendants appealed. The central issue was whether the judge was wrong to find dishonesty where the defendants knew the Fund was entitled to receive the fee but believed it would then be contractually payable to FIML.

1. Appeal allowed. The High Court’s order was set aside and judgment was entered for the appellants.
2. Dishonesty requires a two-stage inquiry. The fact-finder must first ascertain the defendant’s actual state of knowledge or belief as to the facts. The question whether the conduct was honest is then determined objectively by applying the standards of ordinary decent people. The defendant need not appreciate that the conduct was dishonest by those standards. This approach, stated in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 and confirmed in Group Seven Ltd v Nasir [2019] EWCA Civ 614, was the applicable test.
3. The trial judge had made a permissible finding that the defendants knew the Fund had not agreed to the diversion. But he had failed to consider the full picture. The defendants also knew that the Fund was profitable and could not retain the termination fee, which was contractually payable to FIML after receipt. FIML, through its sole shareholder and executive director, had given informed consent to the proposed division. The arrangement could therefore properly be regarded as a contractual short cut. Applying the objective standard, the conduct was ill-advised but did not constitute dishonesty.
4. The Court of Appeal was entitled, in this exceptional case, to reverse the relevant factual finding. Without dishonesty, the claims for dishonest assistance and an equitable proprietary remedy based on fraud failed. The Fund could not establish knowing receipt because retention of the money was not unconscionable as against a Fund which was obliged to pay it to FIML and had suffered no loss.
5. The court also observed that the contractual structure carefully limited FIML’s fiduciary duties. FCM London and its employees, who had no direct contract with the Fund, did not undertake wider fiduciary duties merely by performing delegated functions. Their duty in relation to the Fund’s assets and investments was to act honestly.
6. Judgments in the Business and Property Courts should generally be delivered within three months. Delay warrants particular scrutiny and may make an appellate court more ready to find error, but is not itself a ground for allowing an appeal. The court’s conclusion here rested on the merits.

• Court of Appeal (Civil Division): [2023] EWCA Civ 440. Appeal allowed, the High Court order set aside and judgment entered for the appellants.
• High Court of Justice, Commercial Court: [2022] EWHC 357 (Comm). The defendants and their corporate vehicle were held liable to repay the diverted sum on alternative causes of action.