Fiduciary Duties and Accessory Liability

Question 1

Fiduciary relationship

Answer 1

• The trustee-beneficiary relationship is fiduciary in nature.
• The distinguishing feature of such relationships is that they involve one party owing a duty of single-minded loyalty to the other.

Question 2

Two key fiduciary duties

Answer 2

• (1) No-conflict: A fiduciary must not put themselves in a position where their personal interests conflict with their duties to their principal.
• (2) No-profit: A fiduciary must not obtain an unauthorised benefit as a result of their position as a fiduciary either for themselves or for a third party.
• A fiduciary who breaches these duties will be liable to their principal.

Question 3

Conflict: Self-dealing (Tito v Waddell)

Answer 3

• Self-dealing involves a trustee purchasing assets from the trust or selling assets to the trust. There is a clear conflict as a buyer will always be seeking the lowest price and a seller will always be seeking the highest price.
• Therefore a trustee who holds the legal title is prevented from selling to themselves and for the same reason is prevented from buying trust property (subject to anything in the trust instrument authorising such a transaction).

Question 4

Self-dealing: consequence

Answer 4

• If the trustee does enter into an unauthorised self-dealing transaction, the transaction will be voidable, meaning the beneficiaries can seek to rescind it (i.e. unwind the sale).

Question 5

Can a trustee get around the self dealing rule by incorporating a company?

Answer 5

• A trustee cannot get around this rule by incorporating a company and then selling trust property to that company. There remains an obvious conflict of interest in a situation where the trustee uses a wholly owned company to transact with the trust. This transaction will be voidable in the same way as if the trustee had personally entered into the transaction.
• The situation is more complex if a trustee buys from or sells to a company in which the trustee holds shares but is not the sole shareholder. It will require a more careful look at the facts to determine the substance of the transaction. Broadly, the position is likely to depend upon whether the trustee has a controlling shareholding in the company. If so, the transaction may still be treated as self-dealing.
• If the trustee does not have control of the company, the transaction is unlikely to be treated as self-dealing but it will still clearly involve a breach of the no-conflict rule.

Question 6

Conflict: Fair-dealing (Tito v Waddell)

Answer 6

• Involves the trustee directly transacting with the beneficiary to buy their beneficial interest under the trust.
• The rules here are not as stringent as those involving self-dealing, because the beneficiary is personally involved in the transaction.
• Because the relationship is fiduciary in nature, and the trustee is likely to be in a stronger bargaining position, the trustee must be able to demonstrate that the transaction was conducted fairly.
• The transaction is voidable unless the trustee can demonstrate that they made full disclosure to the beneficiary, acted honestly and fairly and did not take advantage of the beneficiary.

Question 7

Conflict between principals

Answer 7

The no-conflict rule also extends to situations in which a fiduciary’s duties to one principal conflicts with their duties to another principal.

Question 8

Conflict: Consent and consequences

Answer 8

• If the breach causes a loss to the principal, they can sue the fiduciary personally for breach of fiduciary duty. The fiduciary would be liable to compensate the principal.
• Breach of the self-dealing rule and fair-dealing rules result in the transaction being voidable. The beneficiaries may seek rescission.
• If the breach results in a profit to the principal, they may not require a remedy although they may wish to end the fiduciary relationship. If it also results in a profit to the fiduciary, the principal can recover the profit from the fiduciary.

Question 9

No profit rule

Answer 9

A number of broad ways a fiduciary might breach the no profit rule:

• Directly using the property of their principal to make a personal profit.
• Indirectly profiting from their role as a fiduciary.
• Exploiting an opportunity which has come to them as a result of their fiduciary position.
• Receiving a bribe or secret commission to influence the way in which they perform their role as fiduciary.

Question 10

Direct profit

Answer 10

• Example: A solicitor holds client money pending the completion of a property transaction. The money is held in an interest-bearing account.
• In the example above, it would be a clear breach of the no-profit rule for the solicitor to retain the interest. It is income which has been made directly out of their principal’s property and therefore belongs to the principal.

Question 11

Indirect profit

Answer 11

• Example: where a trust holds shares in a company and, in order to better monitor that company, a trustee is appointed as a director.
• In such cases, the directorship may come with an entitlement to remuneration. Because the trustee takes on the director role in their capacity as trustee, they receive the remuneration in this capacity too and must therefore pay it into the trust fund instead of accepting it personally (Re Macadam)
• This rule will only apply where the trustee has obtained the director position as a result of being a trustee. It does not apply if they are independently appointed as director (e.g. if they became a director before taking on the trustee role or if they could have been appointed as director even without the votes attached to the company shares).
• The rule is also subject to anything in the trust instrument which allows the trustee to retain the remuneration (Re Lewellin’s Will Trusts)
• Alternatively, the trustee could seek the fully informed consent of all the beneficiaries.

Question 12

Exploiting opportunities: Keech v Sandford

Answer 12

• A fiduciary is not entitled to keep a profit that they made as a result of an opportunity that comes to them in the course of performing their fiduciary duties. This rule is very strict.
• FACTS: A trustee held a commercial lease on the terms of a testamentary trust for a minor beneficiary. When the lease came to an end, the trustee attempted to renegotiate it on behalf of the beneficiary but the lessor was not willing to re-let the property to the trustee in that capacity because the beneficiary was a minor. The landlord was, however, willing to assign the lease to the trustee personally and did so.
• HELD: The beneficiary made a successful claim for breach of fiduciary duty. The trustee had exploited an opportunity which came to them as a result of their position.. The trustee was therefore required to assign the lease to the beneficiary and account for the profits made.

Question 13

Exploiting opportunities: Boardman v Phipps

Answer 13

• Unusually, the defendants in this case were not the trustees of the trust but the solicitor to the trustees (Boardman) and one of the beneficiaries (Tom Phipps (‘TP’).
• The trust fund included 27% of the shares in a poorly performing company.
• TP and Boardman decided personally to acquire the rest of the shares in the company. They reorganised the company and significantly increased its profitability. This resulted in a profit to the trust but also a personal profit for TP and Boardman.
• Both were held to have breached the no-profit rule and were required to give up their profits (although Boardman was awarded a liberal allowance for the work that he had done, effectively remunerating him for his efforts).
• Neither TP nor Boardman had successfully obtained consent to make a personal profit. TP had sought the authorisation of the trustees, but they cannot provide consent. It must come from the beneficiaries.
• Although Boardman had attempted to obtain the consent of the beneficiaries (and genuinely believed he had done so) it was found on the facts that he had not provided them with sufficient information.
• clear authority for the proposition that a fiduciary will be liable for profit that they make by exploiting an opportunity that has come to them as a result of their fiduciary position, whether or not their principal would (or even could) have exploited that opportunity

Question 14

Profit: Bribes and secret commissions

Answer 14

• where a fiduciary accepts money from a third party in return for performing their fiduciary role in a particular way.
• clear consequence is for the profit to be stripped from them.
• also likely to constitute an offence under the Bribery Act 2010.
• This principle has been extended to cases where a fiduciary receives a secret commission.

Question 15

Secret commission: FHR European Ventures LLP v Cedar Capital Partners

Answer 15

The defendant had acted as the claimant’s agent in the purchase of company shares. Unknown to the claimant, the defendant had an existing contract with the seller of the shares, under which the seller would pay the defendant a commission upon completion of the sale. Receipt of the commission was found to be a breach of the defendant’s fiduciary obligations.

Question 16

Claims for breach of no-profit rule

Answer 16

• Breach of the no-profit rule will result in the fiduciary being stripped of their profits.
• It is now clear from FHR v Cedar Capital that a beneficiary may elect between the following remedies:
• (1) An account of profits: a personal claim which requires the trustee to pay the principal an amount equivalent to the profit they have made.
• (2) A constructive trust: A principal may wish to argue that the profit made by the fiduciary is held on constructive trust for the principal.

Question 17

Claims for breach of no-profit rule: benefits of a constructive trust

Answer 17

(a) A constructive trust provides protection against the insolvency of the fiduciary. The principal is able to identify an asset over which they have rights which rank above other creditors.
(b) A constructive trust also allows the principal to trace into any subsequent profits made by the fiduciary. (Attorney General for Hong Kong v Reid)

Question 18

Accessory liability

Answer 18

• When a trustee misapplies trust property, the beneficiaries have a number of potential claims. One such claim is a personal claim against a person who dishonestly assisted or procured the breach of trust; called ‘dishonest assistance.’
• Dishonest assistance is a fault-based claim: a defendant is only liable if their assistance was dishonest.
• Dishonest assistance claims are not limited to the misapplication of trust property. They also apply to breaches of fiduciary duties by a trustee. For example, a person who dishonestly bribes a trustee to invest in a particular (authorised) investment is liable as a dishonest assistant.​

Question 19

Requirements for a dishonest assistance claim

Answer 19

In order to find a person liable for dishonest assistance of a breach of trust, it is necessary to establish that:

(a) there was a trust in existence at the material time;
(b) the trustee committed a breach of that trust;
(c) the defendant assisted the trustee to commit that breach of trust; and
(d) the defendant’s assistance was dishonest.’
- The same principles apply to breach of fiduciary duty.

Question 20

Dishonest assistance - Requirement (c) Assistance

Answer 20

• The defendant must assist the trustee or fiduciary in connection with the breach. It is sufficient if the defendant assists the trustee or fiduciary to plan, commit, or cover up the breach
• The defendant cannot avoid liability by proving that the trustee or fiduciary would have committed the breach even if the defendant had not assisted them. If the defendant assists, they are liable.
• It is also sufficient if the defendant procures or instigates the breach of duty.

Question 21

Dishonest assistance - Requirement (d) Dishonesty

Answer 21

• A person who assists a trustee or fiduciary to commit a breach of duty is only liable if they act dishonestly.
• ‘means simply not acting as an honest person would in the circumstances.’ (Royal Brunei Airlines)
• Ivey v Genting Casinos:
  (a) What (subjectively) was the individual’s state of knowledge/belief as to the facts?
  (b) Was their conduct dishonest (objectively) by the standards of ordinary people?

Question 22

Dishonesty - Case law examples

Answer 22

Royal Brunei Airlines

• The claimant airline appointed a company to sell tickets for its flights. The company agreed to hold the proceeds from the sale of the tickets on trust for the claimant. In breach of trust, the company applied the proceeds for its own purposes.
• The defendant was the company’s managing director and principal shareholder. The claimant sued him for dishonest assistance.
• The defendant was liable. He knew that the proceeds from the sale of the tickets were held on trust. And he caused the company to apply them for its own purposes. Honest people do not misappropriate or misapply other people’s property, nor do they assist others in doing so.

Starglade Properties Ltd v Nash

• Larkstore Ltd held money on trust for the claimant as part of a broader commercial arrangement. Nash was Larkstore’s sole director. He caused Larkstore to pay the trust money to Larkstore’s unsecured creditors.
• Nash did not know that there was a trust. He believed that the claimant was an unsecured creditor.
• Nash was liable. ‘deliberate removal of the assets of an insolvent company so as entirely to defeat the just claim of a creditor’ was inconsistent with ‘ordinary standards of honest commercial behaviour.’
• It did not matter that Nash was unaware that the arrangement between Larkstore and the claimant had given rise to a trust.

Question 23

Dishonest assistance: Remedies

Answer 23

• A dishonest assistant is liable for the loss occasioned by the breach which they assisted. The claimant is not required to show a direct link between the assistance and the loss.
• ‘What must be shown is that the conduct assisted the breach of trust and that but for the breach of trust the loss would not have occurred’
• A dishonest assistant is also potentially liable for profits they acquire by reason of their participation in the breach. The claimant must demonstrate that their participation was the ‘real’ or ‘effective’ cause of the profits. The simple ‘but for’ test is not appropriate.
• The claimant does not have an automatic right to the assistant’s profits. The court has a discretion to grant or withhold the remedy. The court withholds the remedy where it would be disproportionate.

Question 24

Dishonest assistance remedies case: Novoship v Mikhaylyuk

Answer 24

• The defendant negotiated with the claimant’s agent to charter some ships. As a result of the negotiations, the claimant chartered the ships to the defendant. The terms of the charters were favourable to the claimant.
• During the negotiations:
  (a) the agent was being paid secret commissions
  (b) the agent was diverting part of those commissions to the defendant.
• The CoA decided that:
  (a) the agent’s negotiations with the defendant were a breach of his fiduciary duty
  (b) the defendant assisted the breach by participating in the negotiations
  (c) the defendant’s assistance was dishonest because he was aware of the secret commissions
• The defendant made a profit of $150m. The CoA concluded that the claimant was not allowed to recover the profit. Although the defendant’s assistance, i.e. his participation in the negotiation, was a ‘but for’ cause of the profit, it was not the real or effective cause.