Professional trustees avoid liability for investment losses

The London High Court recently held in Daniel and another v Tee and others [2016] EWHC 1538 (Ch) that three professional trustees of a will trust were not liable for alleged losses of £1.5 million incurred by the trust due to its exposure to technological and telecommunications companies following the 'dot.com bubble' crash in 2001.

Background

The Claimants were two beneficiaries of a will trust (the "Trust") that was established by their father, Mr Daniel, prior to his death in 1999. The Defendants (Mr Tee, Mr Redfern and Mr Osborne) were partners at Stanley Tee LLP, a law firm which had been Mr Daniel's solicitors prior to his death. By Mr Daniel's will, Mr Redfern and Mr Osborne were appointed as executors of Mr Daniel's estate and as trustees of the Trust. Mr Tee was not appointed as trustee of the Trust until 2004 but he had been involved in the investment of trust funds from an early stage.

The Claimants claimed compensation of around £1.5 million for breach of trust in connection with the investment of the trust funds between 2000 and 2002, during which time the Defendants had relied on advice provided by Taylor Young Investment Management Limited ("Taylor Young"). The Defendants had previously worked with Taylor Young in respect of other trusts and their own personal pensions. The Claimants claimed that the Defendants had breached their duties by failing to implement a suitable investment strategy or review the investments as time went on, and by relying on Taylor Young's advice, which resulted in losses due to investment in poorly performing shares.

Judgment

The High Court proceedings centred on two claims: 1) the alleged breach of duty by the trustees in failing to act prudently when investing trust funds; and in the alternative 2) the alleged breach of duty by the trustees in impermissibly delegating to Taylor Young all investment responsibility and thereby breaching their equitable duty of skill and care.

Duty of trustees to act prudently

Following discussion of the relevant case law, the Deputy Judge (Richard Spearman QC) concluded that the correct test to apply to determine a breach of duty to act prudently by trustees was the test formulated in Wight v Olswang [2000] Lloyd's Law Reports PN 662 and Nestle v National Westminster Bank plc [1993] 1 WLR 1260. This is to look at the ultimate action in relation to the shares "and ask oneself whether or not that was something which a trustee, complying with the duty to act prudently which is laid down in the authorities, could reasonably have made" (per Neuberger J in Wight v Olswang).

The Court held that the Defendants had acted in breach of duty by failing to implement a suitable investment plan for the Trust. The Defendants had taken a decision as trustees to have an investment portfolio comprising 80−85% equity investments, and the Court held this was too high risk for the Trust and a decision that no trustee, complying with the duty to act prudently, could have made. However, it was noted that the exposure to equities did not actually reach 80% during the relevant time.

The Deputy Judge then went on to review the advice received from Taylor Young and considered the trustees' decision to follow it. The Defendants had chosen Taylor Young on the basis that previous dealings with this advisor had proven successful and that Taylor Young undertook extensive research prior to giving advice. It was held that it was appropriate to rely on "the advice of responsibly chosen advisors". It was further held that although the trustees were at fault in allocating an inappropriate risk strategy to the Trust (i.e. 80-85% equities) and Taylor Young's advice would have been different if a more realistic risk strategy had been adopted, it may not have made any material difference to the initial investments (as the amount invested in equities at the time was below 30%).

The Deputy Judge reviewed the key investment decisions between 2000 and 2002, and considered that key factors were: the fact that the Defendants did not follow Taylor Young's advice unthinkingly and had continued to attempt to diversify the portfolio of the Trust by purchasing zero-coupon bonds and gilts; that at the time, the Trustees were aiming to balance short term performance disappointment with long term investments to strengthen the portfolio of the trust; and that the Trustees had considered replacing Taylor Young as advisors, ultimately doing so in December 2001.

On balance, the Deputy Judge held that once all circumstances had been taken into account, including the tenor of Taylor Young's recommendations and their explanation for their advice, he did not consider that no trustee, acting with the appropriate prudence, could reasonably have decided to invest assets of the Trust in those companies. He added that although there had been some breaches of duty in the early stages of the relevant period, the Claimants had failed to prove that they had suffered loss as a result of those breaches. The Deputy Judge further added that should the test applied in determining breach of duty to act prudently be too generous on the Defendants, relief would have been granted to the Defendants under section 61 of the Trustee Act 1925 (which provides the power to relieve trustees from personal liability if they have acted honestly and reasonably and ought fairly to be excused for the breach of the trust).

Delegation

The Claimants had also put forward a claim for substitutive performance (which in this case would have been damages) should the claim for the breach of duty to act prudently fail, on the basis that the Defendants had breached their equitable duty of skill and care by impermissibly delegating to Taylor Young.

The Deputy Judge again found in favour of the Defendants on the grounds that they had acted in a way that they thought was in the best interest of the Trust and the best way to discharge their duties. In addition, the Deputy Judge noted that the Trustees did not automatically invest in every company that Taylor Young suggested, but had sufficient input on investment strategy and decisions. He also held that if any impermissible delegation had occurred, it had not caused any loss to the Claimants.

Comment

This decision provides some useful guidelines for trustees who are seeking advice from investment advisors in relation to trust assets. A key point repeatedly stated by the Court is the importance of creating an appropriate risk strategy for a trust prior to requesting advice on which investments to make. Trustees should ensure the chosen risk profile is appropriate to the relevant trust and is reviewed regularly to ensure that it is still set at the appropriate level considering the market at the time and other factors.

Additionally, whilst there is nothing wrong with seeking investment advice, and indeed if it will usually be correct to do so, before seeking external advice on investments, trustees should ensure that their investment advisors have a full understanding of the strategy and risk profile of the trust, and should check that a system is in place for trustees to review and discuss investment recommendations prior to decisions being made. Although the Court ultimately found in favour of the Defendants in this case, criticisms of their actions were present throughout the judgment and there was a finding that the trustees had breached their duty in relation to the investment strategy. On slightly different facts judgment might have been awarded in favour of the Claimants. This case is therefore a cautionary reminder to trustees to tread carefully when investing trust assets and involving third party investment advisors, and in particular, to ensure that trustees remain responsible for the investments and must not simply allow investment advisers to act without any oversight or review.