Beware of those shadows

  • Author : Glen D’Arcy
  • Date : December 2012
ABOUT THE AUTHOR: Glen D’Arcy TEP is Business Development Manager at Intertrust Guernsey

It would be very surprising to find a STEP member who has not encountered the odd client, settlor, beneficiary or protector who has at times made an attempt to impose a direct influence, with good intent or otherwise, on the direction or decision-making mechanisms that should be followed in any fiduciary relationship.

We know the situations only too well; they may be the direct and threatening (akin to bullying) route: ‘Either do what I say or I will move the trusteeship/directorships…’ Or a quasi-sycophantic route whereby one encounters the very real possibility of breaking the general rule that one acting as a trustee (or director) must not put oneself into a position where one’s duty as a trustee (or director) and one’s personal interest conflict or may conflict: ‘You are simply the most ingenious trustee/director ever. By the way, would you like to accompany me to the Champions League/World Cup…’

There is, of course, another option, and that is to sit back, take your fees (courtesy of statutory authorities contained in the relevant Trustee Acts or laws) and do nothing to either justify said fees or fulfil your mandatory duties.

However distasteful some might view the above comments, let us not be naïve – such incidents happened, are happening and will happen in the future. This being said, the main point I am trying to focus on is the individual who does nothing at all, holding the position of trustee or director (or both).

Fiduciary obligations

In the corporate world, the position and attached importance of holding a directorship is quite clear and supported with a plethora of case law. In Westmid Packing Services Ltd, Secretary of State for Trade and Industry v Griffiths [1998],Lord Woolf MR stated:

‘It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities. The appellants may have been dazzled, manipulated and deceived [by the alleged shadow director] but they were in breach of their own duties in allowing this to happen.’

I would contend that Lord Woolf would have delivered a similar judgment in the case of trustees who may have been similarly dazzled, manipulated and deceived (just in case there are some who are saying ‘but I am a trustee, not a director’). Effectively when things go wrong you have nobody to blame but yourself.

The Companies Act 2006 (CA 2006) imposes fundamental duties on directors that are not dissimilar to those imposed on trustees by the various trust acts and laws worldwide. The most important of these are to:

  • exercise independent judgment – s173 of CA 2006; and
  • exercise reasonable care, skill and diligence – s174 of CA 2006.
Shadow directors

It was no doubt the thinking in Westmid that the directors had not fulfilled their statutory duties and that they had effectively abdicated their responsibilities to the so-called shadow directors. But this is where the crux of the matter comes to the fore. CA 2006 defines a shadow director (s241(1)) as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’.

Perhaps the important words here are ‘the directors are accustomed to act’. Note how the statute does not identify the shadow director as a director, either as de jure or de facto. Furthermore, in Re Hydrodam (Corby) Ltd [1994],Millet J stated that what was needed was to establish a shadow directorship as being a ‘pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others’.

In my view, the judgments delivered in both Westmid and Hydrodam are clear – shadow directors are not directors. Furthermore, in Ultraframe (UK) Ltd v Fielding, it was established that a shadow director does not owe fiduciary duties to a company other than the possibility of a duty of care as imposed by common law. This then brings in the argument that holding shadow directors to the same level of accountability as de jure or de facto directors is not possible, or if it is, this has neither been tested nor considered in depth by the courts to date. As previously stated, the fundamental duties of directors, as per statute, are personal and cannot be abdicated.

Some would argue that an amendment to CA 2006 is necessary in order that a unified definition of a director (be they de jure, de facto, shadow or by whatever name they be called) is in statute. Such an occurrence would put company law on an equal footing as exists in the Finance Services and Markets Act, which provides that a shadow director owes the same duties to a company as any other type of director.

Trust practitioners

How does this affect us as trust practitioners? I would argue that the principles established in company law apply equally to trust law. Unless I am mistaken, I have seen no definition of a shadow trustee and can only opine that such a position does not exist in law.

As with company law, under trust law you are either a trustee or you are not – there is no halfway pit stop that enables an individual or corporate trustee to simply abrogate responsibility and liability.

Perhaps the closest we can get to a ‘shadow trustee’ is to discuss the protector. However, the position of protector is a relatively new concept and there is a body of opinion that states the position effectively undermines the role that in law has historically been fulfilled by the trustee.

Case law in this regard is on the verge of ‘nonexistent’ and, significantly, there is no clear precedent that determines whether a protector owes a fiduciary duty to beneficiaries.

This brings me back to the heading of this article – beware of those shadows. The work we do is both interesting and enthralling, and for our expertise we have, mostly, enjoyed (and still enjoy) fruitful and satisfying careers. But we need to be aware of maintaining our independence and exercising our judgment, and at the same time performing our statutory duties, because when things go wrong (I could fill this publication with case history of litigation) those ‘shadows’ very quickly disappear and we know who gets left to face the music.

On a more current note, the recent Cayman Island case of Weavering Macro Fixed Income Fund Limited (in Liquidation) v Stefan Petersen and Hans Ekstrom [2011] is a salutary reminder of the duties directors (in this case the directors being non-executive), and by extension trustees, must fulfil. The court in Weavering held that both Messrs Petersen and Ekstrom breached their duties to exercise both independent judgment and reasonable care, skill and diligence. Penalties in such cases vary differently from the mere disqualification decided on in Re Bradcrown Ltd [2001] to the USD111 million judgment awarded against Messrs Petersen and Ekstrom in Weavering. Both cases do, however, have one thing in common – directors of both companies, as Lawrence J Collins stated in Bradcrown, ‘simply did as they were told and abdicated all responsibility’.

Ordinary prudent man of business

So there you have it. You are either a director or trustee (or even both) or not, but whichever category you fall under, the message is clear: you have fiduciary duties. Of course, when things go wrong, beneficiaries, shareholders, stakeholders and even you might try to shift blame, especially when financial penalties are in the pipeline. But the simple truth is that trustees must discharge their duties, adopting the same standard of care an ordinary prudent man of business would take in managing similar affairs of his own. In reaching judgment in Re Speight (1883) 22 Ch D 727 (and affirmed in Speight v Gaunt (1883) 9 App Cas 1) Sir George Jessel MR stated:

‘It seems to me that on general principles, a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man would conduct his own, and beyond that there is no liability or obligation on the trustee… It could never be reasonable to make a trustee adopt further and better precautions than an ordinary prudent man would adopt, or to conduct the business in any other way. If it were otherwise, no one would be a trustee at all.’

Of course, any prudent trustee would, as circumstances permit, delegate responsibilities and this – despite the general rule that a trustee must discharge his duties personally and may not delegate; delegates non potest delegare – is possible mainly through the creation of statute.

In summary, an ordinary prudent man of business does what he considers correct and if unsure seeks and obtains advice. Doing nothing, not understanding what one is doing or simply not questioning is not what such a man does.


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