Dishonesty: The Ivey Test Requires Substantive Application, Not Formulaic Separation

1. Introduction

This decision concerns the application of the two-stage test for dishonesty and the substantial obstacles facing an attempt to overturn a trial judge’s findings about a defendant’s knowledge and beliefs. Its central clarification is that a judgment must apply the subjective and objective stages of the dishonesty test in substance, but need not express its conclusions in a prescribed, mechanically separated form.

The proceedings arose from banking services supplied by First Curaçao International Bank N.V. (“FCIB”) to companies in the telecommunications and computers sector involved in missing trader intra-community fraud (“MTIC fraud”). Transworld Payment Solutions UK Limited (“TWPS”), which marketed FCIB’s services, and its liquidator brought claims principally alleging FCIB’s participation in, or assistance with, fraud committed by those companies’ directors. The pleaded causes of action included dishonest assistance in breach of fiduciary duty and fraudulent trading.

The second respondent was FCIB’s sole shareholder, a director and, at the relevant time, its chief executive officer and president. He was also TWPS’s ultimate beneficial owner. He was the only individual against whom dishonesty was alleged.

Importantly, the claimants did not allege that he actually knew that any identified customer or transaction was fraudulent. Their case depended instead on his alleged knowledge, or deliberate avoidance of knowledge, of widespread sectoral fraud and inadequate compliance protections.

The Court of Appeal refused permission to appeal. The judgment therefore clarifies existing principles in the context of an unsuccessful permission application; it does not introduce a new test for dishonesty or determine the other proposed grounds of appeal.

2. Background and Procedural Outcome

FCIB was incorporated in the Netherlands Antilles. It ceased trading in 2006 after the Court of First Instance in Curaçao placed it into emergency measures. Its electronic banking customers included companies operating in the sector affected by MTIC fraud.

Following a 19-day trial, Leech J delivered a 429-page judgment, reported at [2025] EWHC 2480 (Ch). A substantial part of that judgment examined the second respondent’s knowledge of fraud, the development of FCIB’s compliance arrangements, and his understanding of their effectiveness. Although the second respondent did not give oral evidence, the judge heard other witnesses and considered extensive contemporaneous documents.

The judge rejected the allegation of dishonesty. The claimants sought permission to appeal on ten grounds against the resulting order dated 23 October 2025. However, it was common ground that none of the remaining grounds could succeed unless the challenge to the dishonesty conclusion succeeded.

After considering the application on paper, Zacaroli LJ directed an oral hearing and required a further skeleton argument, limited to 12 pages, identifying the alleged legal errors. The original grounds and skeleton had been overlong and insufficiently precise.

At the hearing on 15 October 2026, the claimants principally argued that the judge had misapplied the two-stage dishonesty test. The Court refused permission and subsequently gave its reasons. Butcher LJ agreed with Zacaroli LJ’s judgment.

Principal conclusions

• The judge correctly stated and substantively applied the governing dishonesty test.
• His failure to set out separately labelled answers to its two stages was not a legal error.
• His assessment addressed the pleaded allegations and did not impose an artificial threshold for dishonesty.
• An admitted arithmetic error did not arguably undermine the decisive findings about the second respondent’s knowledge and beliefs.
• The first proposed ground disclosed no arguable error of law with a real prospect of success; consequently, the permission application failed.

3. Precedents Cited and Their Significance

3.1 LZLabs Gmbh & Ors v IBM UK Limited [2025] EWCA Civ 842

The Court referred to paragraphs 20–21 of this authority for the demanding standard facing challenges to findings reached after a trial involving extensive evidence.

The relevance was practical as well as doctrinal. Leech J had spent considerable time examining witnesses, documents and the relationships between numerous factual issues. His ultimate conclusion on dishonesty was an evaluative judgment resting on that detailed factual foundation.

The authority supported appellate restraint, not immunity from review. A genuine legal misdirection or a material error could still justify intervention. But disagreement with the judge’s assessment could not become a viable appeal merely by being described as an error of law.

3.2 Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67; [2018] AC 391

This was the governing authority on dishonesty, and the parties agreed on its application. The test requires:

1. Identification of the individual’s actual knowledge or belief concerning the facts.
2. Assessment of the individual’s conduct, in light of that factual understanding, against the objective standards of ordinary decent people.

The first stage is subjective: what did this defendant actually know or believe? The second is objective: was the conduct dishonest when assessed against the applicable external standard?

The Court concluded that Leech J had performed both tasks. He made findings about the second respondent’s knowledge and beliefs, then assessed whether his conduct was dishonest. The governing question was therefore whether the reasoning substantively applied Ivey, not whether the conclusions appeared under separate headings.

3.3 Grosvenor Property Developers Limited v Portner Law Limited [2026] EWCA Civ 1238

The claimants relied on Falk LJ’s warning at paragraph 52 against compressing the two stages of the dishonesty test into one.

In that case, the trial judge had framed the inquiry as whether an honest person would have acted as the defendant did. As explained at paragraph 55, that formulation risks classifying conduct as dishonest simply because an honest person would have avoided it through greater care or competence. Carelessness and other shortcomings do not necessarily amount to dishonesty.

The present Court distinguished that substantive misdirection from an objection about presentation. Leech J had correctly articulated the test and made findings about actual knowledge and belief. His subsequent descriptions of the conduct as not dishonest were, read in context, objective conclusions at the second stage.

The two decisions therefore operate consistently: judges must not merge distinct legal inquiries, but neither must they adopt a ritualised structure where their reasoning already demonstrates that both inquiries were undertaken.

3.4 Group Seven Ltd v Nasir [2019] EWCA Civ 614; [2019] 3 ALR 1011

The claimants invoked paragraphs 96–97 to argue that Leech J had wrongly “compartmentalised” the evidence instead of considering its cumulative effect.

In the cited case, the problematic separation concerned payments into and out of an account. One defendant’s negotiation and concealment of a payment was self-evidently dishonest, and that payment depended on the prior receipt of a much larger sum. His dishonest involvement in the outward payment could not sensibly be insulated from his involvement in receiving the funds that made it possible.

The present proceedings were materially different. No particular customer or transaction was identified in the pleaded knowledge allegation as fraudulent, and no aspect of the second respondent’s conduct was established as self-evidently dishonest.

Accordingly, Group Seven Ltd v Nasir did not prevent the judge from organising his analysis around the pleaded allegations. The critical question remained whether that structure caused him to overlook the overall inference of dishonesty. The Court found no realistically arguable basis for that criticism.

4. Analysis of the Court’s Reasoning

4.1 Substance governs the application of the dishonesty test

The principal oral argument was that the trial judge had collapsed the subjective and objective stages. This particular alleged error had not been expressly identified in the grounds of appeal. The Court indicated that an application to amend would have been necessary, but that the omission would not have been fatal had the point possessed sufficient merit.

It did not. The judge had correctly stated the law and made clear findings about the second respondent’s state of mind. His conclusions that particular conduct was not dishonest were then properly understood as objective evaluations.

The Court characterised the demand for separately expressed answers as a complaint of “form over substance”. That observation does not dispense with either stage. It means that an appellate court reads the judgment as a whole to determine whether both stages were actually performed.

4.2 The pleaded case defined the relevant inquiry

The claimants alleged that the second respondent knew, or shut his eyes to the fact, that MTIC fraud was believed to be prevalent in the sector; knew that reputable banks had withdrawn services; and nevertheless pursued that business without effective anti-money laundering procedures.

They argued on appeal that the judge had substituted an excessive requirement: knowledge that the “vast majority” of prospective sector customers were fraudulent.

The Court rejected that reading. Although the judge used different expressions in different passages, his critical finding was that the second respondent did not know or turn a blind eye to MTIC fraud being believed “prevalent or widespread” in the sector. That addressed the claimants’ own formulation.

The judgment therefore establishes no numerical threshold for dishonesty. It neither requires knowledge that most customers are fraudulent nor identifies any proportion of suspect business below which a bank’s conduct is necessarily honest.

4.3 Blind-eye knowledge requires deliberate avoidance

The trial judge had also identified the requirements of blind-eye knowledge in the dishonest assistance context. The accessory must suspect that the fiduciary is engaged in wrongdoing and consciously decide to look away rather than investigate.

This distinction is important. Awareness of general risk, deficient procedures, or a failure to investigate does not automatically establish the deliberate avoidance of suspected wrongdoing required by that concept.

The Court accepted that the evidence supported the judge’s rejection of the alleged knowledge and deliberate avoidance. It also identified an evidential basis for findings that the compliance function was not known to be incapable of filtering out fraudulent customers and that banking services had not been made available without inquiries into possible MTIC fraud.

4.4 An admitted arithmetic error was not materially decisive

The respondents accepted that the judge had made an arithmetic error when estimating the proportion of the sector involved in MTIC fraud. The Court nevertheless rejected the argument that it supplied a realistic basis for appeal.

First, the decisive issue was the second respondent’s contemporary understanding and belief. The actual incidence of fraud could not substitute for proof of his state of mind.

Second, the underlying statistical evidence was thin. It consisted of one set of figures and one person’s analysis, without expert evidence. The judge had expressly recognised the difficulty of drawing reliable conclusions from that material.

Third, the principal reasons for accepting the second respondent’s account rested on other evidence, particularly contemporaneous documents. The erroneous figures appeared again in a passage introduced as an illustration, rather than as an essential foundation of the conclusion.

The Court’s approach was thus one of materiality: identifying an error is not enough where there is no realistic argument that it affected the decisive reasoning. The discussion of expert evidence was case-specific, not a general rule that expert evidence is indispensable in every claim involving sectoral fraud.

4.5 An assumption for illustration is not a factual finding

The claimants also submitted that the judge’s own findings established obvious dishonesty because the second respondent knew that 50% of the sector was fraudulent.

The Court identified two problems. The relevant discussion concerned FCIB’s customers in the sector, not the entire sector. More fundamentally, the judge had merely been prepared, for an illustrative argument, to accept that the second respondent shared certain assumptions about fraud prevalence. He had not positively found that the second respondent possessed that knowledge.

This distinction is essential when reading lengthy judgments. An assumption adopted to test an argument is not equivalent to a finding proved on the evidence. The claimants could identify no separate finding establishing the knowledge on which their submission depended.

4.6 Structured fact-finding was not improper compartmentalisation

The trial judge explained that adherence to the pleaded case was necessary to keep an exceptionally extensive fact-finding exercise manageable. The Court accepted that approach.

Breaking a judgment into individual allegations does not itself mean that the evidence has been considered in isolation. The relevant question is whether the judge subsequently appreciated the overall issue and the possible cumulative inference.

Here, the Court found no realistic prospect of establishing that the judge had overlooked that overall assessment. The supporting factual findings were numerous, and the underlying findings identified by the Court were not themselves challenged.

4.7 The limits of what was decided

The written challenges also criticised the period examined, the treatment of acknowledgments about compliance weaknesses, and an alleged requirement to prove dishonesty by others within FCIB or TWPS. The Court recorded those complaints but did not formulate separate, generally applicable rulings on each.

Nor did it decide the remaining nine proposed grounds, which depended on overturning the dishonesty conclusion. The decision should therefore not be treated as resolving every substantive issue arising from the original claims.

5. Potential Impact

For dishonesty litigation

The decision reinforces the need to distinguish actual knowledge, deliberate avoidance, negligence and objectively dishonest conduct. Evidence of a high-risk business environment or imperfect controls may be relevant, but it does not automatically establish dishonesty.

Equally, the judgment creates no safe harbour for banks serving fraud-prone sectors. Its conclusion depended on the pleaded case and the trial judge’s supported findings about this defendant’s knowledge and conduct.

For appeals

Prospective appellants must identify a genuine and material defect in the reasoning rather than extract isolated language, convert assumptions into findings, or reargue the weight of the evidence. Even a conceded error may be insufficient where the decisive conclusion rests securely on independent findings.

The procedural history also underlines the importance of concise grounds that identify precisely how the judge allegedly went wrong.

For judgment-writing and commercial compliance disputes

Judges retain flexibility in structuring complex reasons, provided the applicable legal stages remain substantively distinct. For parties, the case highlights the importance of contemporaneous documents and evidence connecting alleged compliance shortcomings to the relevant decision-maker’s actual understanding.

Its broader significance remains bounded by its procedural setting: this was a refusal of permission to appeal, applying established principles rather than replacing them.

6. Complex Concepts Simplified

MTIC or carousel fraud

A form of cross-border VAT fraud involving trading chains in which tax is not properly paid to the revenue authority. The present case concerned banking services supplied to companies involved in such fraud.

Dishonest assistance

Liability for dishonestly helping another person breach a fiduciary duty. Providing assistance alone is insufficient: the required dishonesty must also be established.

Blind-eye knowledge

Consciously avoiding investigation after suspecting relevant wrongdoing. It is more than simply failing to notice something or conducting inadequate checks.

Subjective and objective assessment

The court first identifies what the defendant actually knew or believed, then judges the conduct against the standards of ordinary decent people.

Evaluative judgment

A conclusion reached by assessing multiple facts together, rather than by answering a single factual question or performing a calculation.

Permission to appeal

The preliminary authorisation needed before an appeal proceeds. Here, the proposed challenge failed to show an arguable error with a real prospect of success.

Material error

An error capable of affecting the relevant conclusion. A mistake that does not undermine the decisive reasoning will not necessarily justify appellate intervention.

7. Conclusion

The Court of Appeal reaffirmed that the two stages of the Ivey test must be applied substantively, not displayed in a prescribed verbal format. Reading the judgment as a whole, Leech J had established the second respondent’s knowledge and beliefs before objectively evaluating his conduct.

The decision also illustrates the importance of pleading, evidential foundations and materiality. Neither general allegations about a fraud-prone sector nor an immaterial arithmetic mistake provided a realistic basis for reopening the trial judge’s detailed dishonesty assessment. Permission to appeal was accordingly refused.