05 January 2017

Trustees and conflicts of interest – sidestepping the rule against self-dealing


It is a basic principle of trust law that trustees may not put themselves into a position where their personal interests conflict with their duties as trustee.   If a trustee has a personal interest in a transaction relating to the trust then he or she may be committing a breach of trust.  This is called the rule against self-dealing.   Such transactions may be undone by the court (and the trustee pay the costs of any proceedings). But does the rule apply where the conflict of interest arises after the person became a trustee?  The case of Newman v Clarke provides clarification.

WHAT IS THE RULE AGAINST SELF-DEALING?

A long line of court decisions have held that a trustee, as with other types of fiduciary, must not place him or her self in a position where their personal interests conflict, or may potentially conflict, with their duties as trustee.   It is also clear that a trustee must not derive any personal advantage from the administration of the trust unless expressly authorised to do so.

The rule was applied strictly in the leading case of Boardman v Phipps where a trustee used knowledge he had acquired as trustee to make a commercial gain for himself without informing the beneficiaries.   The trustee was made to repay to the beneficiaries much of the value of the gain he made.

In Newman v Clarke, the trustee, Mr Clarke, sought to purchase the freehold of a property owned by the trust.   One of his co-trustees, Mrs Newman, who also happened to be his daughter, took action against him.   However, the circumstances were quite different to those in Boardman v Phipps.

THE PROCEEDINGS

In 1996 Mr Clarke settled £150,000 on trust to benefit various family members including his grandchildren, Brooke and Billy.   His daughter, Mrs Newman, was one of the trustees.

In April 1997, Mrs Newman and her husband granted a lease of 1 Vicarage Drive, Beckenham, Kent to Mr Clarke.   Subject to certain conditions in the Leasehold Reform Act 1967 being met, that lease entitled Mr Clarke to purchase the freehold interest in the property.

In June 1997, Mr and Mrs Newman sold their interest in the freehold of 1 Vicarage Drive to the trustees of Mr Clarke's 1996 settlement.  Less than a week later Mr Clarke was appointed as a trustee of the 1996 settlement.

In March 2015, Mr Clarke served a notice under the Leasehold Reform Act 1967 purporting to exercise his right to acquire the freehold interest in 1 Vicarage Drive from the trustees (of which he was one).

Mrs Newman, as trustee, together with Brooke and Billy as beneficiaries, brought proceedings in the High Court against Mr Clarke on the basis that Mr Clarke was breaching his duties as trustee.

WHAT DID MRS NEWMAN AND THE BENEFICIARIES WANT?

The claimants relied on the principle that trustees, as fiduciaries, must avoid conflicts of interest.  They relied in particular on the rule against self-dealing.  They argued that Mr Clarke fell foul of the rule against self-dealing because he sought to acquire the freehold interest in the property in his personal capacity as tenant from himself in his capacity as a trustee.  Essentially, Mr Clarke's personal interest was in conflict with his duties as trustee.

DECISION

The court reviewed the basis for the self-dealing rule and the nature of a trustee's conflict of interest. It noted that Mr Clarke became a tenant under the lease before he became a trustee.  His right under the Leasehold Reform Act 1967 to acquire the freehold came from the lease and so the court held that this falls within an exception to the rule against self-dealing.  In another case decided many years previously, which Mr Clarke's counsel drew to the Court's attention, the effect of the self-dealing rule had not been applied because 'there could be no rational ground for applying the self-dealing rule to the unilateral exercise of a right granted before the trusteeship came into force.'

The court concluded that because Mr Clarke became a tenant of 1 Vicarage Drive before he became a trustee and because the right he is asserting came out of the lease, it must fall within this permitted exception to the self-dealing rule, and he could therefore purchase the freehold from the settlement in this case.

One surprise is that Mrs Newman was alleging conflict of interest against her father, Mr Clarke, despite having been in a similar position herself previously.  In 1997 she and her husband sold the freehold in 1 Vicarage Drive to the trustees of the 1996 settlement of which she was a trustee!

FAILED ATTEMPT TO AMEND THE CLAIM

Mr Clarke had already issued an application in the first-tier tribunal for it to determine the price of the freehold interest he wanted to purchase.  Those proceedings were stayed in light of the High Court proceedings.

The claimants asked the High Court to give permission to amend their claim to focus instead on concerns they said they had about Mr Clarke's future conduct in the first-tier tribunal proceedings.  Specifically, they said that they were concerned that Mr Clarke, as trustee, would only allow inappropriately low valuation evidence to be put forward by the trustees so as to enable him to purchase the freehold at a low price.  On the legal basis for amending their claim at this advanced stage of the proceedings, the claimants sought to rely on the case of Kim v Park (a libel case) in which the court had said that it was wrong in principle to strike out a claim 'without giving [the claimants] an opportunity of rectifying the defect'.

However, the court held that the concerns expressed about Mr Clarke's future conduct in the first-tier tribunal proceedings did not amount to the formulation of even 'the legal bones of a claim'. It also seemed to the court that any reformulated claim along the lines that were being suggested would amount to 'a wholly new claim.'

Accordingly, the court held that the claimants could not amend their claim to raise the concern they had about the valuation evidence that may be produced in the other proceedings.  The claimants' claim was dismissed summarily without a final trial.

IS THE DISPUTE OVER?

The court's comments about these concerns being a completely new claim leave open the possibility of the claimants issuing fresh proceedings focused on those concerns.  They may, however, have had enough of legal costs by now…

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