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No compensation for beneficiaries of a Will Trust who lost value in the dot-com crash

25 Aug 2016

Two beneficiaries of their father’s Will Trust have failed in their compensation claim against the solicitors administering the trust’s funds when almost £1.5 million was lost in the dot-com crash of 2001.

During times of market uncertainty following Brexit, this High Court ruling acts as an example of the way in which an overall view will be formed regarding an assessment of whether a breach of trustees’ duties has occurred.

The Will Trust

Glyn and Amy Daniel were left £3.4 million in trust in their father’s Will, drafted by Stanley Tee Solicitors. Jack Daniel appointed two of the firm’s partners, David Redfern and Paul Osborne, to be the executors of his estate and the trustees of the Will Trust as Glyn and Amy were children when he died. The Will contained provision to the effect that professionally appointed executors and trustees could be paid for their services in the course of the administration of the estate.

After Jack died in 1999, the trustees collected Jack’s assets and sold his business for cash, seeking investment advice thereafter. For their services in acting in the administration of the estate and acting in accordance with the initial investment of the funds, David and Paul received a sizeable total of £92,000.

Management of Investments

Neither David nor Paul had any level of previous experience or expertise in managing investments so they sought the assistance of their trusted investment advisors, Taylor Young. Previous advice sought from Taylor Young by David and Paul related to other client matters and to their own private pensions.

Due to market confidence around ‘tech stocks’ in 2000, David and Paul, on the advice of Taylor Young, invested the Will Trust monies predominantly in equities. However, when the stock market crashed in late 2001, the portfolio’s value unfortunately plummeted.

Action against the Trustees

As a result of the significant loss of value in the portfolio, Glyn and Amy Daniel decided to pursue an action for breach of trust against David and Paul (and a third professional also involved in the management of the trust). The claimants’ action was predicated on the notion that the investment strategy for the trust had not been properly considered and specifically that the solicitors had not invested in a comprehensive, diversified portfolio matching the aims and risk-profile of the trust.

To quantify the loss, a financial expert instructed by the claimants determined that the trust assets would have been worth almost £3.5million in March 2002 if they had been invested less heavily in equities. The actual value of the trust assets at that time was just around £2.4million. This amounted to a notional loss of just over £1million in 2002, equating to a loss of £1.4million in 2016 (accounting for lost growth on the 2002 amount). Glyn and Amy’s claim against the trustees was therefore for approximately £1.4 million.

David and Paul contested the claim that they were in breach of their trustees’ duties or that any breach of trust, which was established under the circumstances, caused the loss. David and Paul then relied upon the established defence to a breach of trust on the basis that they acted honestly and reasonably in the course of their appointment as trustees under s61 of The Trustee Act 1925.

In his decision determining that the trustees had not breached their duties, Deputy Judge Richard Spearman QC noted that the trustees’ investment choices would need to be ‘imprudent’ to establish liability. He decided that, though the trustees were wrong to invest in the portfolio with Taylor Young, due to market uncertainty at the time, the result of any investment decision at the time would not have differed greatly even if good decisions had been made. He determined that even when the stock market showed signs of falling, the trustees were correct to continue to invest in equities in the hope of market recovery. Some breaches of duty were established but the claimants failed ultimately to prove that these breaches were the cause of subsequent loss. Ultimately, it was decided that the solicitors would have been protected from personal liability under s61 of the Trustee Act 1925.

So when will a trustee be in breach of trust?

A trustee will be in breach of trust if he acts (or fails to act) in a manner either authorised by law or through the Trust document. This can happen if, for example, the trustees:

  • Distributed trust assets to a non-beneficiary;
  • Invested trust fund monies in a way not permitted;
  • Breached the common law or statutory duty of care i.e. if they exercised a power of investment without doing so with such skill and care as is reasonable in the circumstances; or
  • Breached a fiduciary duty, such as the duty not to place themselves in a position where their own interests conflicted with those of a beneficiary (or where there is a real possibility that conflict could arise).

It is worth noting that, if a trust document authorises a trustee to do something not permitted by the general law, such as self-dealing under certain conditions if these conditions are met, a breach of trust would not be found to have occurred.

Similarly, if a trust document contains clauses excluding or excusing trustees from liability for something that is a breach of trust, a breach of trust would often not be found to have occurred unless trustees had not acted honestly or in good faith and in the best interests of the beneficiaries.

Breach of Trust Not Established In This Case

Ultimately, the judgment here in Daniel and another v Tee and others 2016 reiterates that in finding whether a breach of trustee duties has occurred, having regard to the law’s protection of trustees who act in good faith and honestly and, generally, having regard to all the circumstances of the case are primary considerations.

For further information, please contact Alice Clewes, Partner at Hay & Kilner

Call: 0191 232 8345

Email: Alice.Clewes@hay-kilner.co.uk