When a company's money is misused, the director responsible is usually held to account. However, the law has a long arm, and anyone who dishonestly helps a director to breach their duties can be made personally liable, even if they were not a director themselves, as a recent High Court ruling demonstrates.

What is "dishonest assistance"?

Directors have a fiduciary duty to their company. This, in simple terms, amounts to responsibilities of loyalty and good faith, including not misusing the company's money. Where a director breaches such duties, any third party who dishonestly assists in this breach may be held liable for the resulting loss. This is known as "dishonest assistance" and is framed as a form of accessory liability.

However, three breaches must be demonstrated for such a finding. The first is a breach of duty by the director; that the third party assisted in this wrongdoing; and that they did so with dishonest intent. This last element is crucial, and sets a high bar for guilt to be established. Such allegations of dishonesty are judged by what the individual actually knew or believed, and also by whether their conduct would be regarded as dishonest by the standards of ordinary, decent people. As the Judge put it, negligence, even gross negligence, is not a sufficient sin in and of itself. Carelessness will not necessarily make you liable, but knowingly aiding someone in a wrongdoing can.

The case in point was brought by the liquidators of a collapsed company. They allege that its directors had run a fraudulent scheme through the company's bank accounts over several years, and that a bank relationship manager had dishonestly assisted in the directors' breaches of duty. This was accompanied by a related allegation that the bank had failed in its duty to question suspicious payments.

The bank applied to have those claims struck out. The Court, however, declined, allowing the claim to continue subject to some tightening of the pleadings, on the basis that the allegations were properly arguable and that determining whether there had actually been demonstrable dishonesty was a crucial question for trial.

It is at this juncture important to stress what this ruling did and did not decide. These are unproven allegations; the case is at an early stage; nobody has yet been found liable and, while the issues involving the corporate banking entity may have been removed (or since settled), the claim regarding the actions of its specific employees has proceeded to trial.

Implications:

In summary, the primary implications are as follows:

• Non-directors, including advisers, bankers, or family members, can be held personally liable for a company's losses if they assist in a director's wrongdoing.
• Claims require proven dishonesty, as simple carelessness or negligence is insufficient to establish liability.
• Intentionally turning a blind eye to obvious financial red flags can be legally treated as dishonesty.
• Liquidators can actively pursue associated professionals to recover funds, especially if the responsible director is broke or missing.
• Professionals and banks must investigate and question payment instructions if they suspect money is being misappropriated.

The broader significance lies in the reach of the principle, as you do not have to be a director to be sued over the misuse of a company's money. Where a director has acted in breach of his or her duty – especially where that director is insolvent or has since disappeared – liquidators are increasingly looking to those around them, including their associated accountants, solicitors, bankers, business associates, and even family members who ‘lent a hand’. If any have been found to have acted dishonestly in assisting a breach, they can be held personally liable for the loss.

The protection, and it is a genuine one, is that honest conduct is not liable, and neither is negligence – such claims only bite in cases of demonstrable dishonesty. For professionals or anyone handling a company's finances, the moral is to remain vigilant to signs of dishonesty and not to facilitate transactions you suspect are improper, as deliberately shutting your eyes to an obvious problem can be viewed as tantamount to dishonesty. Moreover, a bank should pause to question a payment instruction when it has reason to suspect that money is being misappropriated.

Such claims are also demanding on procedure – a court will expect dishonesty to be set out with specific facts and not simply asserted, thereby protecting reputations from suspicion and hearsay. The wider lesson here is that responsibility for a company's lost money is not confined to its directors alone, as those who knowingly aid and abet such dishonesty can be made to share in reparations. However, the key notion is that of wilful dishonesty, and any honest adviser or employee acting in good faith has nothing to fear.

Disclaimer:  This simplified summary of a UK legal case is for general information only. It is based on a claim issued in the High Court. It is not intended as legal advice, may omit important detail, and may not reflect any subsequent developments or appeals. Please read the full judgement and seek professional legal advice before acting.