Flood of recriminations

Thursday, 01 October 2009
A review of the decision in Jones & Ors v Firkin-Flood & Ors (2008) EWHC 2417 and the lessons it provides for trustees on monitoring and intervening in the running of underlying family business in a trust.

There are clear risks for any trustee tasked with responsibility for holding an interest in a trading business. Particular risks can arise where beneficiaries are also involved in the running of the business. In Jones v Firkin-Flood, the trustees were criticised by the court for failing to properly supervise the management of the trust’s businesses, and allowing transactions to be concluded for the benefit of a family-member trustee who was also a beneficiary. The case provides an important lesson to trustees on the dangers of adopting a languid approach to the supervision of the trust’s trading businesses.

The facts

When Douglas Firkin-Flood (allegedly a member of Manchester’s most notorious gang) died in 2001, he divided his estate between his children Daniel, Ian and Louise. In his will, Douglas settled a number of valuable trading businesses on broad discretionary trusts as to income and capital, but with a defeasible right to income in the proportions 30 per cent for Daniel (the eldest child), 60 per cent for Ian, and 10 per cent for Louise.

Douglas executed his will four days before he died. He appointed as executors and trustees Ian, Mr Jones (his solicitor) and his long-standing friends (and employees), Norma Levy and Graham Bramley. The trust held shares in two companies whose principal assets were a hotel and a nightclub. The will directed that Ian run the affairs of the businesses and have the power to remove and appoint trustees.

In the words of Mr Justice Briggs, both Douglas and Mr Jones, the sole professional trustee, considered that ‘Ian was much the worthiest’ of the beneficiaries. The trustees duly left Ian to run the businesses over a six-year period and he was installed as sole director of the companies.

By 2008, the businesses that were settled in the trust had all been disposed of. Ian and his co-trustees formulated a proposal to distribute the proceeds to the beneficiaries where by Daniel would receive 17.8 per cent, Ian 71.5 per cent and Louise 10.7 per cent. When this was communicated to Daniel and Louise, family relations deteriorated. The trustees decided to seek directions from the court approving the ultimate division. Daniel and Louise counter-claimed with a number of allegations over Ian’s conduct in running the businesses, the monies he had extracted over a six-year period, and questioning certain transactions made in his favour. The principal allegations were:

  • the trustees failed to supervise Ian’s management of the assets of the trust;
  • the trustees failed to provide proper accounts and information;
  • Ian had engaged in a number of self-dealing transactions;
  • the proposed division of the trust fund was unreasonable and in breach of trust; and
  • the trustees should be removed from office and independent trustees appointed.

Supervising the underlying businesses

In Bartlett v Barclays Bank Trust Co Ltd [1980] 1 All ER 139, Brightman J stated that it is:

‘a trustee’s duty to conduct trust business with the care that a reasonably prudent businessman would extend to his own affairs, … a prudent businessman would not be content to receive only such information on that company’s activities as was dispensed at annual general meetings’.

Brightman further stated: ‘The purpose to be achieved is not that of monitoring every move of the directors, but of making it reasonably probable … that the trustee or one of them will receive an adequate flow of information in time to enable the trustees to make use of their controlling interest should this be necessary for the protection of their trust asset.’

Whilst Douglas had clearly intended that Ian run the businesses, the will did not contain an ‘anti-Bartlett’ clause that would have excluded the duty outlined above and would have absolved the trustees from their duty to enquire and monitor Ian’s management. Ian was the sole director of the companies for six years and clearly felt that they were his ‘exclusive domain’. The trustees did not even participate in deciding issues such as Ian’s salary that had been increased (by Ian) from GBP58,000 to GBP140,000 per annum.

Not only did the trustees allow Ian to run the businesses alone, but they took minimal action as regards the administration of the trust. The underlying businesses paid no dividends, which was surprising in light of the beneficiaries’ income interests as set out in the will. It was only when the decision had been taken to sell the companies (some seven years after the testator’s death) that the trustees took the, by then unavoidable, step of meeting together to decide what to do with the proceeds. Had there been more frequent meetings it may be that certain of Ian’s actions might not have been allowed to take place. Briggs, J was particularly critical of the solicitor-trustee who ‘it does not appear… considered it necessary to sit his three lay trustees down together and read them the will, or supplement it with a proper explanation of the nature and extent of their duties’.

Self-dealing

Further complaints arose over Ian’s purchase of a substantial asset from one of the companies in the trust at approximately 30 per cent of the cost. For a director to make a purchase at an undervalue he must get the agreement of the shareholders (s320 Companies Act 1985). No advice was given by Mr Jones or his firm as to the need to obtain shareholders’ approval when advising on the transaction. In addition, questions were raised over a company comprised in the trust having dealings with a company called CSCL (in which Ian held a substantial interest). The trustees had failed to consider the possibility that CSCL’s activities, and the benefits that flowed to Ian, were attributable to Ian’s misuse of a casino business opportunity that should arguably have belonged to the nightclub in the trust.

Division of the trust fund

During the trial the trustees justified their proposed division of the trust by explaining what they believed Douglas’ wishes were and why he had favoured Ian. Furthermore the trustees justified giving Ian a greater proportion because they needed to take account of ‘Ian’s children and the employees’. It was unclear, though, why the trustees felt it necessary to take account of the employees who were not actually included as beneficiaries of the trust. Mr Bramley, one of the lay trustees, was one such employee and as such he was therefore in a position of conflict. Briggs J accepted Daniel and Louise’s criticism that the trustees had wrongly taken account of the employees interests. He also expressed concern that the trustees wished to distribute more of the trust fund to Ian on the basis of his performance as sole director for which he had been separately, and generously, remunerated.

Removal of the trustees

Briggs J held that it was clear that the trustees’ behaviour constituted an ‘abdication of their duties’ and expressed concern that they had neither sought nor received guidance from the solicitor-trustee on the scope of their duties or even prepared trust or estate accounts.

Briggs J rejected the trustees’ argument that they should only be removed for deliberate faults and held that any kind of breach, whether intentional or based on ignorance, could be sufficient to justify removal. He referred to the oft-quoted passage in Letterstedt v Broers (1884) 9 App Cas 371:

‘It is not every mistake or neglect of duty or inaccuracy of conduct … that will induce the Court [to remove a trustee]…the act or omission must be such as to endanger the trust property or to show a want of honesty or a want of proper capacity to execute the duties, or a want of reasonable fidelity’.

Briggs J held that the trustees, and particularly the solicitor-trustee whose removal was ‘inevitable’, had shown a want of capacity, which he characterised as unfitness, and had ‘amply demonstrated their collective unfitness to be trustees’. He was particularly critical that they had withheld income from the complainant beneficiaries, Daniel and Louise, which he believed demonstrated a lack of impartiality and empathy for their situation. The Judge did not believe that Mr Jones, who he said was ‘ignorant of the nature of trustees’ duties’, acted with deliberate intent, but said that he had demonstrated that he was not fit to act as a trustee. He also levelled particular criticism at Ian for having put himself in a position where his actions could not be adequately monitored.

Briggs J felt he had no choice but to remove Mr Jones and Ian. He also removed Mr Bramley as trustee because he did not believe that he would act impartially as a continued employee of Ian. The Judge did, however, decide to leave Mrs Levy in office because she had no conflict of interest (she remained employed by the businesses that had already been sold by the trust) and considered it appropriate and helpful to have someone with historic knowledge of the family as trustee. He ordered that new independent trustees should be appointed to act with Mrs Levy and to consider how to proceed with the division of the trust fund. He concluded by encouraging the parties to consider mediation to address the unresolved issues.

Conclusion

The criticism that was levelled at the trustees for failing to monitor and intervene in the management of the underlying businesses highlights the importance of an anti-Bartlett clause for trustees who hold interests in trading businesses. However, it may well have been the case that those trustees would not have been protected by such a clause in any event, if it were established that they were on notice of irregularities in the management (and indeed in some cases it appeared they had facilitated them!). It is not sufficient to claim ignorance of one’s duties to avoid facing removal and potential personal liability. The lesson for all trustees is that no matter what the settlor’s wishes are, it is important that trustees consider and exercise the powers and duties available to them fairly and impartially. In Jones v Firkin-Flood the court had no hesitation in setting out a clear procedure for the appointment of new independent trustees who would be untainted by the flood of recriminations that had already spilt forth in the course of the trial.

Author block
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Steven Kempster, Oliver Egerton-Vernon

Steven Kempster is a Partner and Head of Trust and Estates Disputes at Taylor Wessing LLP.
Oliver Egerton-Vernon is a trainee Solicitor in the Private Client group at Taylor Wessing LLP.

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