A matter of loyalty

Saturday, 01 February 2014
John Harper considers how trustees should act when faced with a conflict of interest

In business and financial matters, as elsewhere, relationships of all shades are established depending upon the circumstances. They may be contractually binding on all parties, voidable or even unenforceable. But there is one type of relationship that imposes the highest degree of responsibility and consequent liability on the part of a transgressor – and that is the fiduciary relationship. In the context of our areas of business, this is most commonly encountered in the case of trustees, protectors of trusts and directors of companies.

A fiduciary is someone who has agreed to act on behalf of another for a particular purpose and where the overriding obligation of confidence, trust, integrity and loyalty is expected of that person at all times. They must act in good faith; must not profit from the relationship, save as may be agreed at the outset; and must never allow themselves to be in a conflict situation as between their own interest and that of the person or persons for whom they are acting. Indeed, the fiduciary is liable to hand over any unauthorised profit even if their situation only may conflict with that of their principal. It does not actually have to do so. Guardians, executors, attorneys, receivers, directors and partners are all fiduciaries. However, the duty of loyalty for the trustee could be said to be more intense than in other cases and the courts have zealously stamped upon those who deviate from that duty.

So, what can trustees and protectors (or indeed company directors) do if they think they may be in a position of conflict? In the case of a director who is one of many, they should, as soon as is practical, openly declare their actual or possible conflict to the board and, depending upon the circumstances, take no part in any proceedings where their influence on a particular outcome may be otherwise possible. It may even be prudent to seek the consent of shareholders for their proposed action. The courts have heard innumerable cases over the past 100 years or more in relation to the failure of company directors to exhibit unfaltering loyalty to their company. The fact that they are fiduciaries places a much higher burden of responsibility and corresponding liability on them than is the case with other employees. Should a director be found to have such a ‘secret’ conflict or indeed fail to carry out their fiduciary duties to the company for any other reason, it will normally be for the company (through the other directors) or, if the company is in liquidation, the liquidator to bring an action against the director if one is required.

It is always open for the director to resign, drastic though that might be. That course is never so easy for a trustee, and particularly if they are the sole trustee, as such a course of action would cause undoubted hardship to the very beneficiaries they were there to care for. A trustee in a potentially ‘impossible’ situation may well be advised to seek the directions of the court. In as much as the court (of the jurisdiction of the governing law of the trust) always retains inherent jurisdiction over a trust, it can make any orders it wishes in relation to that trust. If a trustee or protector is uncertain about a particular course of action and the possibility of a conflict, the sanction of the court will give them the green light they are seeking to proceed on a certain course and, hopefully, they will be directed that the costs may be charged to the trust fund.

Being utterly loyal to your beneficiaries is not the same thing as doing exactly what they ask. A beneficiary has no duty to the other beneficiaries or indeed anyone else in that capacity. They must be assumed, therefore, to be always acting in their own self-interest. There is nothing wrong with that, but trustees should always be aware that the one who shouts the loudest is not always the most deserving. It is probably wise to think of the issue in terms of being loyal to the whole class of beneficiaries rather than to one or more individual. Furthermore, where the terms of the trust allow for ‘issue and remoter issue’ to become beneficiaries, the exemplary standard of loyalty must not just be to those beneficiaries alive today, but to all those as yet unborn.

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John Harper

John Harper TEP is a regular tutor for the STEP Offshore Diploma face-to-face courses

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