Analysis
Mr John Bayley settled property on trust on 17 November 1983. He died in 1987. The trust was established with the assistance of the settlor’s longstanding business associate and friend, Mr Derek Gray, who provided various services to the trust through the first defendant, SG Associates (SGA), a company of which he was a director. From 1998, Mr Gray was also director of a US company known as Clean Diesel Technologies (CDT), which developed, designed, marketed and licensed technologies and solutions for the reduction of emissions from combustion engines. He was also a director of SGA Advisors Ltd (the trustee), a corporate trust company established under the laws of the British Virgin Islands, which was acting as sole trustee of the trust.
Mr Gray, in his capacity as director of SGA, met with the legal representatives of the beneficiaries in order to discuss investment strategy in February and March 1999. The beneficiaries were primarily concerned to maintain low risk investments, given that Jonathan Bayley, a beneficiary of the trust, was relying on the trust assets for his financial security. Mr Gray therefore suggested that the trust investments could be divided into four parts: adventurous investment (25%), equities (25%), with the remaining 50% being invested in a mixture of bonds, private company loans, and cash. CDT and ProStraken Group Ltd (Straken), another company of which Mr Gray was a director, were identified as possible adventurous investments. In April 1999, Mr Gray further wrote to the beneficiaries suggesting that the assets should be invested 10% in low risk venture capital (previously described as adventurous investments), with the remaining 90% to be invested in low risk equities, international bonds, commercial loans, and cash.
However, between 1996 and the end of 2006, SGA, acting for the trustee, invested over £350,000 in CDT. It also invested £200,000 in Straken, and by the end of 2006, the investments in CDT and Straken together represented 66.4% of the total trust assets (investment in CDT alone representing 53.4%). Up until 2006, the investment in CDT had been primarily successful, and the value had increased.
In 2006, upon examining the trust accounts, the beneficiaries became concerned as to the extent of the investment in CDT. The partner of Sarah Bayley (who was a beneficiary), upon researching CDT, formed the view that the investments were risky and speculative, and he also regarded Mr Gray’s role as director of the company as giving rise to a fundamental conflict of interest. He expressed his concerns to the beneficiaries and as a result of these discussions the beneficiaries agreed that they would ask Mr Gray to sell the shares.
Sarah Bayley met with Mr Gray in early 2007, expressed concerns about investment in CDT and Straken, and asked for the trust assets to be invested elsewhere. Discussions with Mr Gray were complicated by two factors: the fact that the beneficiaries had been told that the trust was a discretionary trust over which Mr Gray had substantial control, and due to his involvement in CDT which gave rise to a need for diplomacy. Little headway was made, and following another meeting, Sarah Bayley sent an email to Mr Gray on 11 June 2007 stating that the family would ‘like to sell the vast percentage of the [CDT] holding leaving a maximum of say £50,000’. On 15 June 2007, Mr Gray informed Ms Bayley that he had been able to identify a buyer for 37,037 shares in CDT. Those shares were duly sold for $130,000. Despite a request that a further 5% was sold upon Mr Gray’s return from holiday, no other sales were effected.
In March 2008, Sarah Bayley entered into further negotiations with Mr Gray. She reiterated the beneficiaries’ need to reduce their exposure to CDT. She negotiated with him in another meeting to reduce the shareholding to 20% of its size. It was agreed that a programme would be put in place to reduce the holding by half over the next three to four months. However, no additional shares were sold before the financial crisis struck in October 2008, during which there was a significant collapse in the value of CDT’s shares. The assets of the trust were distributed to the beneficiaries over the course of the following year, including the remaining holding of 114,447 shares. Perpetuity day was declared to be 27 May 2010 by way of resolution of the trustee, and the trust was wound up.
The beneficiaries, as claimants, brought proceedings against SGA, Mr Gray and the trustee for losses of over £900,000. Mr Gray settled claims against him on a confidential basis, and withdrew from proceedings before trial. The claimants’ claim was twofold. First, they alleged that SGA was in breach of its contract with the trustee, and/or of the duty it owed to the trustee, in failing to sell the CDT shares when it should have done in 2007. As such, they contended that they had a derivative claim on the basis of the causes of action that the trustee had against SGA. Alternatively, they alleged that SGA owed them each a direct duty of care in tort, which they also contend was broken by SGA, (among other things), failing to sell the CDT shares when it should have done in 2007. They relied on expert evidence which stated that the shares in CDT could and should have been sold in the second half of 2007, and that the trustee would have received sale proceeds of £966,702.14 had the shares been sold by drip-feed into the market. SGA (which was in liquidation during proceedings) denied liability. It admitted that it provided international fiscal, trust, corporate advisory and administrative services to the trustee, but it denied that it provided investment advice.
Held:
- 1) Whilst there was no formal or written retainer between SGA and the trustee, the documents indicated that SGA’s mandate extended to advising the trustee in relation to investment strategy, and particular investments, as well as making and managing the investments on behalf of the trustee. Several meetings between the beneficiaries and SGA took place – at SGA’s offices, with minutes taken on SGA taper, and subsequent communications via an SGA email account. SGA charged the trustee for time spent by Mr Gray and others discussing and advising in relation to investment matters. Mr Gray was advising not in his capacity as director of the trustee, but as an employee and director acting on behalf of SGA. SGA also owed the trustee a parallel duty of care in tort;
- 2) It was an implied term of SGA’s retainer that it would act with reasonable care and skill;
- 3) SGA had failed to follow the agreed 1999 investment strategy as to the percentage of ‘adventurous’ trust investments. It had acted contrary to the beneficiaries’ wishes to withdraw from CDT, there was a conflict between the roles of Mr Gray for SGA and CDT, and a lack of diversification of trust investments. The only appropriate step which a reasonably competent investment advisor or manager could take in early 2007 was to advise for the sale of, and to sell, the entirety of the CDT shareholding. It was therefore in breach of its contractual and tortuous duties to the trustee;
- 4) The concerns and wishes of the beneficiaries were not determinative, but were relevant. They should have led SGA to reconsider and review the investment in CDT in early 2007 independently and dispassionately. Such a review would have led a reasonably careful advisor and manger to advise that the entirety of the CDT shareholding should be sold, and to effect a sale. If further approval from the trustee had been necessary, there was no doubt that the trustee, acting in the light of such advice, and in the best interests of the beneficiaries, would have given it;
- 5) In accordance with the expert evidence, the correct approach to calculating loss was on the basis that the shares would have been sold cautiously over time to maximise their value, and with reference to 11.6% of likely growth if the trust assets had they been invested in accordance with the 1999 investment strategy. Deductions were to be made for benefits received by the trustee in respect of the CDT shares – namely a loan fee of £53,097.86 received by the trustee on 17 July 2007, and also of £102,959.10 for expenses which would have been incurred on their sale. The calculation for total loss was (£966,702.14 – £53,097.86) x 11.6%, – £102,959,10. SGA were therefore liable to the trustees to the sum of £916,623.28;
- 6) The claimants were entitled to rely on the trustee’s causes of action by way of a derivative claim against SGA. The causes of action which the trustee had against SGA were trust property – SGA’s retainer by the trustee arose in the administration of the trust, and for the purposes of the trust. Given the conflict between Mr Gray’s interests, the interests of SGA and the interests of the trustee, and the fact that trustee considered its role as at an end, the overall circumstances were properly to be regarded as special or exceptional such that the claimants were entitled to enforce personally the trustee’s claims against SGA.
- 7) It was therefore unnecessary to consider the alternative claim by the claimants that SGA owed them a personal duty of care in tort, and in any case, they did not contend that such a duty arose if there existed a derivative claim;
- 8) Damages were to be paid directly to the claimants, rather than to the trustee. First, the perpetuity date had been declared, and the class of beneficiaries had been closed. Second, all beneficiaries were parties to the action, as claimants, and were represented by the claimants’ solicitors. Third, there was no suggestion that any issue arose between the as to the proper division of the proceeds. Fourth, there was no suggestion by the trustee that it had any outstanding expenses or other sums which it was entitled to have met from the trust property. Fifth, the beneficiaries would be entitled to call for the termination of the trust under Saunders v Vautier (1841) EWHC Ch J82. Finally, payment to the beneficiaries would be the most practical, efficient, and inexpensive way in which the proceeds of the claims against SGA could be distributed to the beneficiaries.
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