Introduction
Directors
Defences
Advantages
This article looks at the effect of Section 70 of the Trusts (Guernsey) Law 1989 (as amended) for directors of trust companies in Guernsey. Section 70 has no counterpart under UK law (although there are similar provisions under the Jersey trusts law and the Turks & Caicos trusts ordinance).
The section, which makes directors personally liable for their company's breaches of trust, can provide a useful remedy to beneficiaries, for instance where the company is insolvent. Indeed, one recent UK case, HR v JAPT [1997] PLR 1 (which is now a leading authority on when a director of a trust company owes a direct duty to a beneficiary) might have been argued very differently had it been heard in Guernsey.
Section 70 says that directors of a corporate trustee are deemed guarantors of the company's liability for breach of trust and in respect of any damages and costs awarded by the court against it. Furthermore, if proceedings are brought against a corporate trustee for breach of trust there is no need to await a finding of the court before bringing Section 70 proceedings against the directors. The two can be commenced together, as the Guernsey Court of Appeal held in Cross v Benitrust (1998/99) 1 ITELR 341.
Section 70 applies to corporate trustees of Guernsey trusts, and also any corporate trustee resident in or carrying on business in or from Guernsey.
'Director' is defined widely to include de facto directors, or controlling shareholders of the trustee company (or of any holding company owning at least one third of the company's shares). 'Shadow directors' are also caught, as 'directors' includes any person in accordance with whose instructions the trustee company's (or its holding company) de facto directors are accustomed to act.
There are statutory defences available to directors. Under Section 70(2) the court may relieve a director if the director ought fairly to be relieved because he or she (i) was unaware of the relevant breach of trust (or the intention to commit it), and was not reckless or negligent in being unaware of it; or (ii) expressly objected to prevent the breach, by voting against it as either director or shareholder or exercising such other rights as he or she had as a company officer.
It is also a defence that a person was not in fact a 'director' at the time of the breach. However, any director who was, and then resigns, or ceases to act as such, remains potentially liable within the limitation period applying to claims for breach of trust. Under Sections 71(2) and (3) of the trusts law, that period is unlimited for a fraudulent breach, and is three years in other cases. Time runs from the earlier of the date of knowledge, delivery of final trust accounts, or the date on which a beneficiary attains majority or ceases to be under any other legal disability.
The principal advantage of Section 70 is that it gives beneficiaries a direct right against directors where a trustee company is insolvent and has no insurance cover, or is otherwise unlikely to be able to meet a damages claim. In such a case, the beneficiaries can "seek a declaration that there is a liability under [Section 70] contingent only upon the giving of judgment for damages or costs" (Cross v Benitrust 353) and join the directors as parties to the action against the company.
A direct right against the directors of a trustee company of the kind afforded under Section 70 would certainly have proved useful in HR v JAPT. In that case, HR was an independent trustee appointed under UK pension legislation (where the fund's employer became insolvent), and sought damages from JAPT's directors in respect of breaches of trust committed by JAPT. JAPT had an authorized share capital of £100, only £0.30 of which was paid up, no staff, premises or other assets. Its sole purpose was to manage and administer the pension fund. The judgment (which was approved in the Benitrust Case) makes it clear that under UK law, the only ways in which a director of a trust company can become directly liable to beneficiaries are:
- if the director 'dishonestly assists' the company to commit a breach of trust under the principles in Royal Brunei Airlines Sdn Bhd v Tan [1995]AC378;
- under the 'Hedley Byrne' principles, but only if the director assumes personal responsibility for any negligent advice (see Williams v Natural Life Health Foods [1998] 2 All ER 577 and Cross v Benitrust 353/54);
- where, in exceptional cases such as fraud or where the company is the director's 'alter ego', the court is prepared to lift the corporate veil as in, for instance, Adams v Cape Industries plc [1990] 1 Ch 433 540 (in all other cases, HR v JAPT is clear that directors owe fiduciary duties only to the company, and to no-one else); and
- under the so-called 'dog leg' claim, that is that the trustee company's right of action against a director for breach of fiduciary duty is trust property which passes to a new trustee, or to a liquidator, and can be actioned by the new trustee, or by the liquidator at the instance of the new trustee or the beneficiaries in their capacity as creditors.
There will often be difficulties with making out these claims. For instance, the test for dishonesty or fraud is high, an assumption of personal responsibility for advice will be rare and the status of the 'dog leg' claim remains unclear in law (although it was not ruled out in Cross v Benitrust 357).
Section 70 avoids these difficulties, as all that is needed is a finding of breach of trust against the company and confirmation of a director's status at the time of the breach. Fears of personal liability frequently cause directors to take a cautious approach to proceedings brought by beneficiaries, and often encourage settlement. In this sense Section 70 is a very powerful weapon in a beneficiary's armoury, and shows a very firm intention that beneficiaries should not be left without a remedy where a trustee company is unable to pay.
For further information please contact Paul Buckle at Collas Day by telephone (+44 1481 723191) or by fax (+44 1481 711880) or by e-mail ([email protected]).
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