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.