The Hong Kong Court considered the test for dishonesty in Galleria (Hong Kong) Limited v DBS Bank Limited [2019] HKCFI 1877.

For some years prior to GHK's collapse, its directors were involved in a fraudulent scheme involving supplying fake bills of lading to lenders, including the defendant bank.  The bank was notified by a third party that some bills of lading were false.  The liquidators alleged that the bank must have known about or turned a blind eye to GHK's fraud, but continued to finance GHK's fraudulent business.  The liquidators claim was brought in knowing receipt, dishonest assistance and fraudulent trading.

The Court considered this was a case of dishonesty, which is a serious allegation requiring proof based on cogent evidence.  In assessing dishonestly, the Court said:

  • The question of a person's state of mind is subjective; it concerns what the person actually knew. However whether the person is honest or dishonest given what he or she knows is objectively assessed
  • Carelessness or negligence are not in themselves manifestations of dishonesty
  • The imputation of blind-eye knowledge requires a suspicion on the defendant's part that certain facts may exist, and the defendant's deliberate and conscience decision to refrain from taking steps to confirm their existence
  • The knowledge of knowledge in different people within a company cannot be aggregated to create a 'notional super-mind' of the company.

The Court found contemporaneous documents showed that the bank’s officers did not have any knowledge or serious suspicion of fraud.  The Court considered that it would be extraordinary if bank officers knowingly ignored fraud against the bank and assisted in inducing a fraud on itself.  The inherent probabilities were stacked against the liquidators' case.

The test for dishonesty is the same in New Zealand: Sandman v McKay [2019] NZSC 41.  Our report of this decision can be found here.

The judgment can be found here.