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Watching the company you keep

  • Author : John Harper
  • Date : October 2010
ABOUT THE AUTHOR: John Harper TEP is a regular tutor for the STEP Offshore Diploma face-to-face courses

I  have looked after trusts in one way or another for over 30 years. As everyone knows, trusts can hold just about any sort of asset. However, of all the classes of assets, the one that has invariably caused the most problems for me is the underlying company.

For the common or garden company, it seems that for trustees the world over, there is certainly no common approach and no one standard template for best practice. I suppose the truth is that no one company, no one family and no one settlor is the same as any other. We have all seen examples of trust owned companies for which the trustees:

  • Provide all the directors or provide all of the directors but have, at some time in the past given unlimited powers of attorney to people they hardly know.
  • Provide none of the directors or some of the directors.
  • Fully administer the company and have control over the statutory records or do not administer the company but are in touch with the administrators on a regular basis.
  • Can never get any sense out of the administrators or cannot even find out who is looking after the company and if it is good standing.
  • Have the original share certificate evidencing their ownership or just a copy of it.
  • Do not have any such certificate and nobody seems to know where it is.
  • Receive regular management accounts and financial statements, or half of them or none at all.
  • Know exactly what the company is doing, have a rough idea or do not know at all.

The list goes on.

There should not be an International Diploma student who does not know all about Bartlett v Barclays Bank Trust Co Ltd (1980) and re Lucking’s Will Trusts (1968), which clearly demonstrate that the careless trustee will suffer the wrath of the judge and bear the cost of losses incurred, so I will not repeat the facts here. We have moved on since the most recent of these cases and now have available to us ‘Bartlett-proof trusts’. It seems that with extensive, cleverly worded exculpation clauses, BVI Vista Trusts, and a range of other exotic products and legislation, we are getting close to a position where the trustee may not be able to enquire into the affairs of the company he owns (as the settlor wants) and will no longer be in a position to be able to provide proper accounting to the beneficiaries. What would the regulators have to say about that in terms of Know Your Client and Anti-Money laundering I wonder?

So if, like me, you believe that for a trustee to know hardly anything about what goes on in the company you own is anathema, perhaps start by explaining to your settlor that if, or rather when he falls off his perch, it might be you who will have to pick up the pieces, as it were. Use your powers of persuasion and try to tick as many of the following boxes as possible:

  • Obtain a seat on the Board. (You better have D&O insurance in place)
  • Ensure that regular board and shareholder meetings are held and call for the minutes. Better still, if it is an offshore entity, make sure that you administer the company.
  • Know what the company is doing. Try to get the settlor and his family to regard you not as interfering and fee generating unavoidable necessities, but rather, experienced, knowledgeable and committed professionals adding value to the trust.
  • Make sure you are comfortable with the other directors (if there are any others than the settlor). After all, indirectly, you employ them.
  • Enquire, observe and listen then upon your return to the office, prepare a file note expressing your opinion as to the state of affairs of the business. If you do that, even if your opinion is later proved to be wrong, you could never be accused of burying you head in the sand and abrogating your trustee’s responsibilities.
  • Demand annual financial statements and, if appropriate, more regular management accounts. A company the directors of which ‘don’t do accounts’ is, for the trustee, a company that is probably going to be more trouble that it is worth.
  • Insist upon receiving an annual certificate of incumbency to show that the company is in good standing.

If you can follow most of these simple rules, you may be able to sleep better at night and get to discover at close quarters just how interesting our industry can be.


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