The UK Legal System and Fiduciaries - Essay Example

Swarna1 Word count: 2453 ID # 5448 d 3rd May 2009. Trusts-UK legal system,fuduciaries   Case study: Anna is a trustee of the Beauty Trust which has a 30% shareholding in Gealette Ltd, a hair implantation company which is developing a new product to introduce hair re-growth in balding people. In her position as trustee, Anna learned that tests on the product were indicative of a successful outcome, and therefore she purchased a 20% shareholding in the company herself. She was subsequently elected as a director of the company and has received considerable sums in director’s fees. Shortly after this, the company then became interested in purchasing a company HairEx, which produced hair extensions. Dean, the company’s solicitor agreed with Anna that she would negotiate the purchase, receiving 5% of the final purchase figure. Anna negotiated the purchase price at £1million. Anna and Dean were also responsible for the renegotiation of the company’s key ingredient (Citsalp) supplier, Kipling Ltd. Kipling Ltd requested £50,000 in advance and £2,500 per month for the exclusivity of the supply, and the company could not afford this. Anna and Dean put together the money themselves and negotiate with Kipling Ltd purchase the supply and its exclusivity. They then offer the company exclusivity of supply of Citsalp at £25,000 in advance and £2,750 per month. [Kipling are happy with this]. Anna decides to sell her shares and retire as director, selling her shares in Gealette Ltd to Beauty Trust for £20,000 below the market value. The new product is delayed and causes Gealette Ltd significant losses, and it is on the verge of folding. Gealette Ltd’s shares are almost worthless. Analysis of Anna’s liability. The nature of a person in decision making decides the success rate in any business enterprise. At times, being aggressive in decision making helps and during some times, it may fail if the organization falters in strategic decisions. Trustee is a person who administers a trust. At the same time, a trustee is considered as a fiduciary and he or she owes the highest duty under the law to protect trust property from unreasonable loss for the trusts beneficiaries. In cases of mismanagement of trust property by trustee, he or she would be held liable for the extent of loss incurred. Anna in the present cases study has undergone the similar experience. Being a trustee of a beauty trust, she has some reasonable rights in representing the trust in several national and international forums. She analysed that the purchase of shares in company “Gealette” would certainly benefit the trust and accordingly the beauty trust purchased 30 % shares in the aforesaid company. However, when she was informed about the strengths and prospects of the future products of the company “Gealette”, she took active interest in increasing her personal portfolio and accordingly she herself purchased 20 % of the company shares which is logically a strategic step on behalf of her. Moreover, she was rewarded with the post of Director of the company “Gealette” and hence her decision of investing in company paid off in short or medium term. This has increased her confidence on her decision making in business expansion. Hence, she became aggressive in purchasing another company “Hairex” through negotiation with the company dean and she even agreed to pay 5 % commission on a deal finalised at @ 1 million pounds. This means that she paid 0.05 million pounds to dean of “Hairex” company assuming that she would certainly get hogher benefit in terms of net returns due to this new investment. In addition, Anna and Dean also renegotiated with the company’s key ingredient (Citsalp) supplier, Kipling Ltd for which Kipling Ltd requested £50,000 in advance and £2,500 per month for the exclusivity of the supply. As the company could not afford this, Anna and Dean decided to invest their own money and negotiated with Kipling Ltd purchase the supply and its exclusivity of supply of Citsalp at @ £25,000 in advance and £2,750 per month. However, Anna decides to sell her shares in Gealette Ltd to Beauty Trust for £20,000 which is below the market value and retire as director. Unfortunately, the new product is delayed and resulted in significant losses for Gealette Ltd, and due to its unsustainable nature it is on the verge of folding. In other words, Gealette Ltd’s shares are almost worthless and Anna cannot expect reasonable amount on sale transaction. We can come to a conclusion on her present net worth status only after analysing her profit and expenditure pattern starting from the point when she became a trustee of the beauty trust to the point when she decided to retire from her post of director of the company. Some figures are known, but some are not known. For example, Anna spent 50000 pounds towards commission of transaction to Dean. At the same time, she became director of the company and gained some percent of profits of the company. But this figure is not known, hence it is difficult to analyse about her net worth. One has to see that the beneficiaries of trust shouldn’t get loss due to the decisions of Anna who is a trustee. According to the rule of the trust, it is the responsibility of the trustee to protect the genuine interests of the trust beneficiaries for which the trust is established (Alistair Hudson, 2004). Whatever the benefits of the trust should be passed only to the beneficiaries through trustee (Dixon Martin, 2006). Hence Anna has to play a quite positive and constructive role here. Her personal decisions are independent of the decisions she took on behalf of the beauty trust. However, our analysis should focus on any scope for misutilisation of the duties of trustee on behalf of Anna who could have played a better role as a trustee. Hence, during the transaction of company shares with beauty trust, one has to thoroughly examine the sincerity and legality from Anna’s side keeping the genuine interests of the trust beneficiaries in mind. Anna may be made liable under misappropriation of trust funds under charities act (2006). She should qualify the“public benefit” test under charities act (2006). According to this, the act of trustee must satisfy the public benefit and for charitable purpose. Other wise, it may be treated as misappropriation of funds and law related to charities in England and Wales makes the person involved as liable (Alistair Hudson, 2007). Moreover, the Charity Commission for England and Wales (section 6 of this Act) will issue guidance in pursuance of its public benefit objective. Its main objective is to promote awareness and understanding of the operation of the requirement for public benefit. Anna may be found guilty and liable for investing her money on purchase of private companies and wasting considerable amount of time and energy in the process. If she is found guilty, according to the section 18 of the 1993 Act charity commission has power to suspend or remove Anna as trustee from membership of beauty trust (Charity act, 2006). The charity commission is empowered to make an order under section 18(1) suspending from his office or employment any trustee, charity trustee, officer, agent or employee of a charity. Hence, Anna may be removed from the office before her retirement under this section. At the same time, the charity commission has the power to protect the properties of the trust and accordingly it issues directions from time to time. In the present case study, Anna’s decision making as a trustee would be critically examined by the charity commission before finalising the liabilities of Anna. Under section 19 of the 1993 Act the charity commission has the power to give specific directions for protection of charity The Commission may by order direct the charity trustees and any officer or employee of the charity, or the charity itself to take any action specified in the order which the Commission interprets to be expedient in the interests of the charity. Moreover, according to section 19A of the 1993 Act charity commission has power to direct application of charity property. In the present case, if charity commission feels that Anna who had possession or control of trust property was unwilling to apply it properly for the purposes of the charity, and if Anna resulted in improper application of that property for the purposes of the charity, it may direct her to compensate the same. In case of general family relations, the law of equity distribution may be analysed differently. For example in case of Stack v Dowden (2007), the division of interests in family property after the breakdown of a relationship was decided and stated that as the couple had kept their finances strictly separate during the relationship the couple did not intend shares in the property to be equal. This permitted the defendant to keep a 65% share against 35% which went to the claimant. But in case of trust equity and property laws, the specific duties as assigned by the judiciary have to be strictly implemented and trustees like Anna would be made responsible for any financial misappropriation. As trust formation rules are well recognised under common law of United Kingdom, if the trustee is found guilty, he would be made responsible and liable for the loss occurred due to misappropriation of property. Moreover, trusts are recognized at international level under the Hague Convention on the law applicable to trusts and on their recognition. This convention will settle the cases of conflict of trust law. In the present case, Anna would be held responsible for the poor state of affairs at the time of her retirement due to some faulty decisions made during asset management of trust. According to the common law of United Kingdom and charity act (2006), trustee may be held personally liable for some problems that arise with the trust activities. In cases where a trustee does not properly invest trust money to expand the trust fund, he or she would be held liable for the loss incurred (Watt Gary, 2003). The trustees were also given full rights of the trust. In other words, the trustees are the legal owners of the trusts property. At the same time, they are also given responsibility to invest the assets of the trust and to ensure preservation of trust property for making it productive for the beneficiaries and to maintain transparency of all financial transactions to the beneficiaries of the trust. In the present case study, Anna didn’t keep transparency of financial investment plans and rather she concentrated on her personal portfolio management. This indicates that she was not committed fully to the trust property management. Hence, she may be held liable for the incurred loss. Accordingly, she should be asked for the compensation of some proportion of her personal assets to the beauty trust according to the Charities act (2006). Some of the judgments given in cases like Barlow Clowes International v Eurotrust International (2005) and Royal Brunei Airlines Sdn Bhd v Tan (1995) and Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (2003), it was stated that liability for dishonest assistance requires a dishonest state of mind on the part of the person who assists in a breach of trust. Such a state of mind may consist in knowledge that the transaction is one in which he cannot honestly participate or it may consist in suspicion combined with a conscious decision not to make inquiries which might result in knowledge. Anna’s decision making as a trustee of Beauty trust would be critically examined under the light of these aforesaid cases and the extent of honesty and sincerity would be examined. Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. However, there are certain legal provisions which protect the interests of the trustees to a reasonable extent. But the intention of the judiciary must be to protect the genuine trustee’s interests. This can be found from the judgment given in case of Brinks Ltd v Abu-Saleh (1996) where it was expressed that a person cannot be liable for dishonest assistance in a breach of trust unless he knows of the existence of the trust or at least the facts giving rise to the trust. Thos was also confirmed in the judgment in case of Twinsectra Ltd v Yardley (2002). Anna has to seek protection under this clause by mentioning that he was unaware about the facts of existence of the beauty trust. For making Anna liable for the breach of the trust formation rules and regulations, it has to be proved that he has been aware of the provisions at the time of formation of beauty trust. Conclusion Overall, Anna would be made liable for the lack of sufficient time devoted for the activities of beauty trust and due to her over personal interests in some companies where she spent more time. Due to her over emphasis on these companies, she not only personally invested significantly but also was responsible for reduction of profits of the beauty trust. Had she not acted according to her individual taste and preferences, she would have given better direction to the investments and portfolio management of beauty trust. At the same time, one cannot doubt the sincerity and honesty of Anna in increasing or diversifying the activities of beauty trust. According to the trust law in United Kingdom, trustee should take the responsibility of property management of trust (Dixon Martin, 2005 ; Jill Martin, 2005) and hence Anna should take full responsibility of beauty trust and its financial transactions. References Alastair Hudson. (2007). Equity and Trusts. Routledge Cavendish publiccation. P:1239. ISBN: 041541847X Alastair Hudson. (2004). Understanding Equity and Trusts. International Specialized Book Service Inc. P: 240. ISBN: 1859418872. Barlow Clowes International Ltd & Anor v Eurotrust International Ltd & Ors. (2005). Court of Appeal - Privy Council, October 10, 2005, UKPC 37. Brinks Ltd v Abu-Saleh. (1996) CLC 133, 151. Charity Act (2006). Part 1. Meaning of “Charity” and “Charitable purpose”. The“public benefit” test. http://www.opsi.gov.uk/acts/acts2006/ukpga_20060050_en_2#pt1-l1g3. Charity Act (2006). Chapter 5. Assistance and supervision of charities by court and commission. Suspension or removal of trustees etc. from membership. http://www.opsi.gov.uk/acts/acts2006/ukpga_20060050_en_2#pt1-l1g3. Dixon Martin. (2006). Q&A Equity & Trusts. International Specialized Book Service. P:188. ISBN: 1859417418. Dixon Martin. (2005). Modern Land law. Routledge Cavendish publication. P: 500. ISBN: 1859418457. Jill Martin. (2005). Hanbury and Martin: Modern Equity. Sweet & Maxwell publication. P:961. ISBN-10: 0421798408. Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd. (2003). 1 AC 469. Royal Brunei Airlines Sdn Bhd v Tan. (1995). 2 AC 378. Stack v Dowden. (2007). UKHL 17. Twinsectra Ltd v Yardley. (2002). 2 AC 164, 174. Watt Gary. (2003). Trusts and Equity. Oxford University press. P: 549. ISBN : 019870061X. Read More