The decision of the High Court in London Capital & Finance Plc (in Administration) v Global Security Trustees Ltd [2019] EWHC 3339 (Ch) considered the circumstances in which the court should exercise its inherent jurisdiction to remove a trustee, where the statutory power under section 41 of the Trustee Act 1925 was unavailable.

In this article, Senior Associate Emma Holland, Trainee Solicitor Emmanuelle Sultan and paralegal Marek Ejmont, in our Trust and Probate team discuss this judgment, which provides helpful guidance on such removal applications and a useful reminder of the dangers of placing key personnel in conflicting roles.

 

Background

The judgment considered the application of London Capital & Finance Plc (LCF) (acting by its administrators) to remove Global Security Trustees Limited (GST) as trustee. LCF operated a business raising money from private investors and making loans to SMEs. LCF raised money by issuing “mini-bonds” to investors, which were secured by a debenture from LCF in favour of GST (acting as a “security trustee”). GST could call in monies owed under the debenture in priority to other investors in LCF for the benefit of the mini-bond holders as beneficiaries. The model proved popular and LCF raised over £237m from more than 11,500 investors.

The way GST was incorporated and its role generally placed it in a position of conflict from the beginning. GST was set up by those involved in forming LCF, a firm of solicitors called Buss Murton Law. Buss Murton’s employees, Robert Sedgwick and Alexander Lee, acted as GST’s directors at various points, and the firm had professional connections with some individuals who benefitted from loans made by LCF.

Matters came to a head in late 2018 when the FCA issued a supervisory notice on the basis that LCF’s promotional material was “misleading, unfair and unclear”. LCF was required to cease its regulated business and not deal with or dispose of any of its assets. An administrator was subsequently appointed in March 2019, who later produced a report that noted a “number of highly suspicious transactions involving a small number of connected people which have led to large sums of the Bondholders’ money ending up in their personal possession or control”. This led to the present claim being issued by LCF’s administrators (the Administrators) in May 2019.

 

Powers available to make an application to remove trustees

Prospective applicants have two distinctive means of removing trustees:

  1. By applying to court to appoint a new trustee pursuant to section 41(1) of the Trustee Act 1925. Applicants petition the court to appoint a new trustee “whenever it is expedient to do so…either in substitution for or in addition to any existing trustee or trustees”. However, section 41(1) is limited by section 58(1) of the Trustee Act as such applications may only be made by a trustee or a beneficiary (as confirmed in Davidson and another v Seelig and others [2016] EWHC 549 (Ch) at para [57]); or
  2. By seeking to invoke the court’s inherent jurisdiction to supervise trusts.

As neither LCF nor the Administrators fell into the prescribed category of applicants under section 41, their only recourse was to seek a removal under the court’s inherent jurisdiction.

 

Issues in the case and grounds for removal

When the court is asked to consider removing a trustee, the legal test is the one set out in the Privy Council’s judgment in Letterstedt v Broers (1884) 9 App Cas 371, namely that the main guide must be the welfare of the beneficiaries. The application of this legal test was not disputed, but counsel for the parties disagreed on the circumstances in which the court should exercise its inherent jurisdiction.

Counsel for the Administrators submitted the test should be no more stringent than under section 41, ie that of expediency.

Counsel for GST argued that the court’s inherent jurisdiction ought to be used only in exceptional circumstances, that is to say, strong grounds for its use should be put to the court. They relied on Lewin at 13-072A, which summarised the decision in Davidson v Seelig where it was said that the court will exercise its power to remove a trustee under its inherent jurisdiction in exceptional circumstances, “such as where there is compelling evidence of misconduct by the trustees which might prejudice the interests of possible future beneficiaries”. Counsel also relied on a passage in Underhill and Hayton, which states:

“A trustee may be removed from his office:

By the court appointing a new trustee in his place (or, exceptionally, under its inherent jurisdiction by simply removing the trustee without replacing him if sufficient trustees remain)…” [emphasis supplied]

 

Decision

Chief Master Marsh held that the court’s inherent jurisdiction was exceptional in the sense that it is not a jurisdiction that is commonly exercised, because the power under section 41 usually suffices. There was no need to add a threshold test of exceptionality for the court to exercise its inherent jurisdiction. Chief Master Marsh stressed that a court “will never remove a trustee lightly” and will always consider an application in light of “all the circumstances, with the welfare of the beneficiaries firmly in mind”. Cases of genuine misconduct by trustees would likely lead to their removal, whereas a falling out between trustees and beneficiaries would likely be insufficient on its own to remove the trustees.

The court was not dealing with conventional circumstances in this case. The role of a security trustee was considered by the court to be different from the role of a more conventional trustee, but it was compared to the role of the trustee of a special trust. (N.B: Although Chief Master Marsh determined here that GST was acting in a trustee-like capacity, the role of a security trustee depends on the contractual agreement constituting the security trustee. Applicants seeking to remove security trustees, in particular, will find that the capacity to remove such trustees depends not only on the underlying conduct but also on the contractual obligations as between the parties.)

Not only did the trustee in this case have the duty to take steps to enforce the security instead of the usual duty to invest, but the circumstances of the case were also unconventional due to “the very substantial shortfall that the bondholders [the beneficiaries] face[d]” and “the very real concerns that exist[ed] about how LCF was operated”. Chief Master Marsh emphasised there was no suggestion here that the beneficiaries were acting capriciously by expressing their support for the removal of GST.

The court took the following three grounds into consideration when exercising its inherent jurisdiction to remove GST:

  1. Conflicts of interest
    The court was reminded of the importance of “single-minded loyalty and the necessity to avoid a position where the fiduciary’s duty and interest may conflict” as stated in Lord Justice Millett’s judgment in Bristol and West Building Society v Mothew [1998] 1 Ch. 1 [at 18]. It stressed that beneficiaries in this case were entitled to have complete confidence that GST would treat their interests as paramount. GST had failed to ensure “its directors [were] not tainted by association with LCF, and its directors, companies who borrowed money from LCF, and those who [had] received substantial sums personally from LCF”.One of GST’s previous directors, Mr Lee, should not have acted as director of GST in light of his professional involvement with LCF and its borrowers. Nor should Mr Lee have remained a shareholder of GST given the control it gave him over GST either by creating a deadlock or voting with the other shareholder.Similarly, appointing one Mr Friedlander and allowing him to remain a director and shareholder, in circumstances where Mr Friedlander was involved in providing services to businesses that borrowed money from LCF, created the clearest conflict of interest.
  2. Utility
    GST had the power to enforce LCF’s obligations under the debenture. It had three express obligations:
    –      to alert the bondholders (beneficiaries) of an event in default;
    –      to enforce the security; and
    –      to distribute recovered proceeds to beneficiaries.Chief Master Marsh noted that GST could not perform the first two functions, and the third obligation was of little value. He criticised GST for not having “applied to the court for guidance about the exercise of its function at the earliest opportunity”.
  3. The wishes of the bondholders/beneficiaries
    The court was alive to many bondholders’ wishes for GST to play no further part. It appreciated that the beneficiaries had concerns as to the involvement of people or entities tainted by associations with the former management of LCF or its borrowers given the likely level of losses they may suffer.

 

Comment

Chief Master Marsh’s judgment gives welcome clarity to applicants who are neither trustees nor beneficiaries and are seeking the court to use its inherent jurisdiction to remove trustees. It also serves as a cautionary tale as to the risks involved when corporate directors take on duties which they do not fully understand and which ultimately place them in a position of irreconcilable conflict.

 


 

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