WALKER v STONES;
Should the Professional Trustee be Worried?
Nick Shaw reviews the history of this case to date and looks at the issues
of concerns for the professional trustee
(taken from Issue No 19 – April 2002
The purpose of this article is to look at the case of Walker v Stones1 as it stands following the Court of Appeal judgement. This is a complicated case but the aspects that I am going to concentrate on deal with breaches of trust and the availability of exemption clauses for trustees in respect of any such breaches of trust together with some of the issues that arise as a result for all professional trustees.
Let us look at the facts. I stress this is a very complicated case. In fact all that has happened so far has been numerous arguments about interlocutory matters. Various applications have been made to amend pleadings. Some of the facts in the case are therefore disputed. However for the purposes of this article, I believe the basic facts are clear.
Mr Stones who was a Jersey Solicitor and a partner in the Jersey firm of Wiggin & Co was a trustee of a settlement called the Bacchus Trust. The other trustee was his partner Mr Osborne but he seems to have taken a more withdrawn background role in the whole issue.
The principal beneficiaries of the Bacchus Trust were the children of George Walker. He was at the relevant time the chairman of Brent Walker Group (`BWG`). Many of you will remember the Brent Walker Group and its collapse at the start of the 1990s. George Walker was the settlor of the Bacchus Trust but was excluded from all benefit.
Although the Bacchus Trust was a Walker Family trust it had nothing to do with the Brent Walker business. It was established with about £50 million which was used to buy various French Vineyards (Chateau le Tour for example). The structure also involved two companies Jasaro and JSR (but for the purposes of this article they have no significance). The Walker family interests in Brent Walker were held through a separate structure.
However in November 1990 BWG was in financial difficulties. A refinancing issue was undertaken. Mr Stones acting on behalf of the trustees guaranteed a borrowing made by Jasaro (owned by the trustees) which enabled that company to subscribe for a bond issue in BWG. There had been some difficulty in securing in the city underwriting for the bond issue given BWG’s financial position.
The Bacchus Trust was a discretionary trust but the trustees had revocably decided that the three adult children of George Walker were for the time being the primary beneficiaries. Those children wrote a letter to the trustees in early December 1990 in which they said they knew what the trustees had done in guaranteeing the borrowing and approved of the action which they said they took to be to their benefit.
As you may probably recall Brent Walker became insolvent, the bonds were worthless and therefore the trust fund suffered a substantial loss of around £20 million.
Mr Walker’s children sued the trustees for breach of trust on the basis that the transaction was outside the trustees’ powers. One suspects they may well have been suing because Mr Stones had insurance, but there is nothing directly in the Court report to suggest that is the case.
There are four basic issues which I propose to look at as a result of what happened namely:
1 The status of exemption clauses in particular that relied upon by the trustees in defending the children’s claim.
2 The concept of honesty or dishonesty.
3 The vicarious liability of the partnership or partners of Wiggin & Co and
4 Did Mr Stones have the benefit of any insurance cover?
I think it is trite to say that Courts are not particularly anxious to see professional trustees in particular relying on clauses in settlement deeds which seek to exempt trustees from liability for breach of trust. There is an international movement seeking to prevent trustees from relying on ever more widely drafted exemption clauses. Indeed the UK Trust Law Committee’s consultation paper on trustee exemption clauses published in November 1998 recommended that paid trustees should not be able to avoid liability for negligence, gross negligence, recklessness, wilful default, dishonesty or fraud except in very limited circumstances.
Perhaps surprisingly nothing appeared in the Trustee Act 2000 to limit the scope of the exemption clauses. However in the final stages of the Bill through the House of Lords the Lord Chancellor did commit the government to reviewing the issue fairly quickly. The Law Commission is indeed undertaking such a review at this time. However we still stand at the moment with the law unreviewed.
In simple terms therefore wide trustee exemption clauses under UK law, although narrowly construed by the Courts, remain legally available to trustees. It does not matter whether the settlor had separate advice on the subject (not that he often does in reality).
What about `public policy`? Essentially it does not matter how wide the clause, no trustee can expect to protect himself against allegations of fraud or dishonesty. That of course naturally leads us into the position where beneficiaries alleging breach of trust have to look to show that the trustees have acted fraudulently, dishonestly or have acted in bad faith. If beneficiaries can show any of these, then the exemption clause (quite rightly) will not protect the trustees.
Clause 15 of the Bacchus Trust was headed `Exoneration and Indemnity of Trustees generally`.
`1 (a) In the professed execution of the trusts and powers hereof no Trustee …..shall be liable (i) for any loss to the Trust Fund arising by reason of any improper investment made in good faith ….. (iv) by reason of any other matter or thing other than wilful fraud or dishonesty on the part of the Trustee whom it is sought to make liable…..`
In Walker v Stones, Mr Stones essentially said that he entered into the disputed transaction (i.e. guaranteeing the borrowing made by Jasaro so that it could subscribe for the loan notes in BWG) as being in the best interests of the beneficiaries in the overall scheme of things. By that Mr Stones meant in their interests personally outside any interest they had within the trust. That was his genuine belief and he honestly held that belief. He was supported and comforted, in that view by the letter from the children.
At first instance Mr Justice Rattee thought that was a good defence. In the absence of any fraud or dishonesty the exemption clause in the Bacchus Trust prevailed. Mr Justice Rattee’s view was there was no dishonesty or fraud because the trustees and Mr Stones in particular had acted on a genuine belief. The personal financial interests of the beneficiaries to the trust were much the same as the financial interest of BWG because they all held shares in that company.
In reaching that decision Mr Justice Rattee was following the line of Lord Justice Millett in the case of Armitage v Nurse2 (which he took as the previous leading case in this area). In that case Lord Justice Millett had said:-
`by consciously acting beyond their powers the Trustees may deliberately commit a breach of trust; but if they do so in good faith and in the honest belief they are acting in the interests of the beneficiaries their conduct is not fraudulent`.
That all seems fairly straightforward I hope. However the Court of Appeal were not very impressed. They went further. Sir Christopher Slade who delivered the Court of Appeal’s judgement said that it was not enough for solicitor trustees honestly to believe that their actions are in the interests or for the benefit of the beneficiaries if:-
`that so called honest belief, though actually held, is so unreasonable that, by any objective standard, no reasonable solicitor trustee could have thought that what he did … was for the benefit of the beneficiaries`
Clearly therefore we are looking at different standards for solicitor trustees (and by implication other professional trustees) and non-solicitor trustees where we should still apply a more objective test. It is not enough for the solicitor trustee honestly to believe something if, on any objective test, no reasonable solicitor trustee could believe that.
The Court of Appeal preferred the view in this area of Lord Nichols in the Privy Council case of Royal Brunei Airlines v Tan3. He stated in that case:-
`the standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale with higher or lower values according to the moral standards of each individual`.
One has to say on the face of it that this is a direct contradiction to what Lord Justice Millett said in Armitage v Nurse where he was quite happy to rely on the subjective test, which was the line followed by Mr Justice Rattee. Sir Christopher Slade did try to reconcile the two views by saying he thought Lord Justice Millett was directing his mind to the not uncommon cases of `judicious breaches of trust`. He did not think Lord Justice Millett would have reached the same conclusion (as Mr Justice Rattee did) in this particular case.
This raises the question of what constitutes a `judicious breach of trust`. That is now both an interesting and perhaps crucial question.
As I indicated earlier, the facts as I have outlined them are a very simplified version of a very complete set of facts. There are other issues (legal and factual) in the case if you care to read it. There are more instances where there are allegations of possible misappropriation of funds. None of course of this is proved because the Court is still at the preliminary stages just dealing with interlocutory matters. However it is possible to have has the feeling that the Court was perhaps not very sympathetic to Mr Stones position overall.
Having said that, although it follows that a professional trustee can be guilty of fraud or dishonesty in pursuing a breach of trust and an exclusion clause would not protect him, the Court of Appeal did not actually make any finding to that effect in the case. It did not decide whether Mr Stones had acted dishonestly because it did not need to. However the Court concluded that there was at least a triable issue to find the answer to the question.
So where does that take professional trustees? The Court of Appeal held that it is not enough for solicitor trustees to say that they genuinely believe that a transaction in breach of trust was for the benefit of beneficiaries if that belief was wholly unreasonable. In deciding whether something is reasonable or unreasonable you have to apply an objective test of whether a solicitor trustee (presumably that means a Solicitor who normally acts as a professional trustee) would have decided it was reasonable or not.
We also have to compare the position of a non-professional trustee. The Court of Appeal was at great pains to make that distinction between professional and non-professional. In a way that has always been the case. A professional trustee has always effectively had a higher duty of care than a non-professional trustee. Although not specifically set out as such in the Trustee Act 2000 there is a distinction drawn between the duty of care owed by a trustee who has a greater experience in dealing with trusts (which implies a professional trustee) than one who is not so experienced.
I think you can understand to a degree the Courts view. If you allow a purely subjective test to apply then professional trustees can essentially say that they believe the most outlandish breaches of trust were okay because they were in the interests of the beneficiaries and that is what they honestly believed.
The consent and support of the adult beneficiaries to the trustees’ actions did not provide any effective comfort in Walker v Stones.
Where does that leave the professional trustee? We are always being told as a matter of good client care that we should get to know the client, know the client’s interests, know client’s businesses and understand the client’s needs. However there is clearly the danger that one becomes too close to the client. You are then susceptible to pressure from the settlor client, or beneficiaries, to take steps as a trustee, which are not strictly authorised because in the overall scheme of things it may well benefit generally the family but not necessarily all the trust’s beneficiaries. Sometimes beneficiaries do not know what is really for their benefit! In other words you become too close.
The answer would seem to be that as a professional trustee you take your own advice from an independent solicitor who is suitably experienced as acting in trust matters. From time to time we all may find ourselves under pressure. There is nothing wrong in taking advice from somebody else who is not so closely involved and may well be able to provide a much more objective view. I do not see anything wrong in the costs of that advice being met out of the trust fund. If the advice is not to go ahead then professional trustees can say to the client that is what advice they have received. If it is to go ahead then they have satisfied the objective test.
Let us just turn to have a look at vicarious liability. By this I mean were the partners in Wiggin & Co liable for the breach of trust and the loss that occurred as a result of Mr Stones action? Wiggin & Co were joined in as parties to the proceedings. They brought three basic defences namely:-
1 The claims against Mr Stones had no real prospect of success. As we have seen the Court did not make a finding in this particular case. Sir Christopher Slade did say that he was concerned at the heavy expense which a trial against Mr Stones would involve and he was by no means sure that the claim would succeed against him but he was prepared to admit there was sufficient substance in the claims that the family should not be de-barred from pursuing them.
2 Even if Mr Stones were liable s.10 Partnership Act 1890 would not apply to render the firm vicariously liable on two grounds namely either
a) Because on the true basic construction of the section, or
b) Because of application of the section to the facts of the case
3 The third defence was in any event that the claims against the firm were statute barred.
For those of you who cannot remember s.10 Partnership Act 1890 it says
`Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act`.
The Court spent quite some time on this aspect. In the end Sir Christopher Slade said:-
`I would accept the argument advanced on behalf of Wiggin & Co that the legislator in enacting s.10 of the 1890 Act treated breaches of trust committed by a trustee partner as falling outside the ordinary business of any partnership and correspondingly incapable of giving rise to vicarious liability under that section`.
It therefore followed that assuming the claim against Mr Stone succeeded, the family could not succeed in establishing liability against Wiggin & Co because s.10of the 1890 Act could not render the firm vicariously liable for his wrong doing as trustee partner.
I have to say that Sir Christopher Slade was not entirely convinced he was right on the interpretation of s.10, because he did go on to then to examine the position if that conclusion were wrong. The question then was whether Mr Stones’ acts and defaults were committed `in the ordinary course of the business of the firm`. That would be a question of fact. Here he concluded that there was no reasonable prospect of establishing liability against Wiggin & Co on this alternative basis either.
That rather left Mr Stones exposed.
Let us look at the insurance position. Before there were wide ranging exclusion clauses included in trust deeds, solicitor trustees who made a mistake or acted in breach of trust did simply that. They were liable for a breach of trust. Now however it appears to establish liability we are into much more serious ground of having fraud or dishonesty alleged. That has obviously serious repercussions for any professional trustees reputation. But as we have seen if a professional trustee is not acting in the ordinary course of the business there is no basis for making your partnership vicariously liable and he or she may not have any insurance cover under the firm’s negligence policy.
That on the face of it is a rather frightening thought for anybody who is an individual professional trustee.
That of course has a corresponding conclusion as far as beneficiaries are concerned. As I said earlier I am pretty certain the Walker family commenced proceedings because they were hoping to recover from Mr Stones’ insurance policy. If he has no insurance policy Mr Stones is certainly not going to be able to pay out £20 million from his own money to cover the loss. What therefore is the point in the beneficiaries pursuing a professional trustee in those circumstances?
It certainly seems to me one of the points that a professional trustee, or those acting for one, would seek to make early on in such proceedings now. If the beneficiaries have a remedy they may not in fact succeed in recovering any money, should they therefore either not pursue the matter at all or look for some other remedy.
What conclusion do we draw then apart from perhaps some disturbing thoughts?Walker v Stones blurs, I think, what is a fundamental distinction between dishonesty on the one hand and negligence on the other. It moves away from the defence that Lord Justice Millett had put forward in Armitage v Nurse that a solicitor who genuinely holds the view that he does and has apparently thought about the issue should be protected. He is not really dishonest at all in those circumstances.
It is certainly arguable that to find dishonesty in those circumstances is a very harsh judgement, especially on a solicitor trustee with all the professional consequences that will have for that trustee. I have to stress however that there was no finding of dishonesty in Walker v Stones. The Court of Appeal simply held that there was a case to be decided at a later date.
Clearly the consequence may well be that professional trustees in particular will become less prepared to take any decision involving any risk in the future. The Courts have traditionally accepted the need for trustees to commit judicious breaches of trust in order to provide some flexibility and common sense in administering trusts. That may now have to be a thing of the past. Where is the line to be drawn between acceptable and non-acceptable breaches?
The case is going to the House of Lords. All professional trustees will have to see what their Lordships can make of it.
Trust & Tax Team
Addleshaw Booth & Co
1  4 ALL ER 412
2  2 ALL ER 705
3  3 ALL ER 97