Dishonesty claims in insolvency cases

By Martin Askew of Clarke WillmottPart 1 of 2

This is the first of a two part law bite that considers Insolvency claims involving dishonesty. The general perception is that claims involving an element of dishonesty are too difficult and uncertain to pursue. This perception appears to be based on a misunderstanding of what the Court requires to make a finding of dishonesty.

The aim of these lawbites is to address two of the key hurdles in establishing 'dishonesty' in order to:* Highlight the viability of bringing these actions; and * Demonstrate the depth of expertise that Clarke Willmott can bring to such proceedings.

Introduction:

The principal claw back provisions contained within the Insolvency Act 1986 ("the Act") are a useful tool for recovering assets. However, they have limitations in terms of the requirements, in most instances, of insolvency and the applicable time limits to bring claims. They may also be subject to issues of recoverability due to genuine or contrived financial difficulty. The existence of claw back provisions is well known and there are advisors who assist to arrange matters to frustrate an IP's attempts to make a recovery.

Sections 213 and 423 of the Act, seek to widen the potential range of recovery actions and there are also common law claims for breach of duty, breach of trust and related claims that can be pursued against directors and, significantly, other third parties. These often require an element of dishonesty to be proved but have an advantage that they enable remedies to be pursued against a wider range of targets, increasing the chances of pursuing someone who will have the means to satisfy a judgment.

The standard of proof in "dishonesty" claims.

The willingness on the part of IPs to resort to such claims is, understandably, tempered by the fact that many such claims require at least an element of ‘dishonesty' to be proved. There is an expectation that reference to fraud or dishonesty raises the required standard of proof, in turn increasing the risk of failure with the attendant write-off of time and potential liability for adverse costs.

This is not, strictly speaking, correct as a claim brought by an IP remains a civil claim for financial recovery, rather than to deprive the respondent of his liberty. A civil claim against an individual or company for damages for dishonest assistance, or similar claims, does not have to be proved beyond all reasonable doubt. The relevant standard of proof remains the balance of probabilities, although it is accepted that the Court will require convincing evidence before making such a finding.

Lord Nicholls explained in Re H (Minors) [1996] AC 563 at 586 that the balance of probabilities is a flexible test:

"The balance of probability standard means that a Court is satisfied an event occurred if the Court considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the Court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that it occurred and, hence, the stronger should be the evidence before the Court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence… Built into the preponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation. Although the result is much the same, this does not mean that where a serious allegation is an issue, the standard proof required is higher. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probability and deciding whether on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established.

"The nature of the evidence being relied upon is a material consideration in assessing the likely prospects of success.

One of the key roles of a Judge is to assess the accuracy and truth of evidence submitted by witnesses. The purpose of cross examination is to test the evidence of any witnesses. The advantage insolvency cases have is that the majority of claims are based primarily upon the available documents. This generally restricts the range of plausible explanations that a respondent can put forward to avoid liability.

Even when fraud or dishonesty is being alleged, the IP will rely on what he regards as the plain construction of the documentary evidence. Strained interpretations put forward by respondents to avoid liability will generally be unconvincing. Judges will, more likely than not, determine cases on the basis of the most natural interpretation of documentary evidence.

The legal advisor has a key role to play. A good advisor will meticulously plan the strategy for every case so as to maximise the chances of success. The strategy will commence at the very outset of the case even before the first demand letters are sent, followed through to the discovery phase and finally at trial. There is no substitute for proven experience when considering claims involving dishonesty. Knowing what evidence to seek, where to obtain it and how to procure it are essential skills to ensure that the balance of probabilities standard of proof can be satisfied.The next law bite shall consider what constitutes ‘dishonesty’ in civil claims.