Analysis
The claimant raised money from private investors for the purpose of making loans to small and medium enterprises. The money was raised by issuing ‘mini-bonds’ for periods of up to five years, at varying rates of interest. Over a period of around two years, £237m was raised from more than 11,500 investors. Security for the bonds was provided by the claimant executing a debenture in favour of the defendant, as a ‘security trustee’. By December 2018, when the FCA issued a first supervisory notice on the claimant on the basis that its promotional material was ‘misleading, unfair and unclear’, L and F were the sole directors of the defendant and each held 50% of the issued share capital. L was a partner in the law firm that was advising the claimant and also had professional connections with individuals who benefited from loans made by the claimant.
On 17 January 2019, a second supervisory notice was issued by the FCA. The claimant had ceased trading and on 30 January 2019 appointed administrators, with the consent of the defendant. A report by the administrators estimated a 20-25% return for bondholders on their investments and highlighted a number of highly suspicious transactions that led to large sums of the bondholders’ money ending up in the personal possession or control of a small number of connected people.
The defendant was advised by counsel that it was inappropriate for it to remain security trustee in view of a conflict of interest. The defendant continued to act; L resigned as director but retained the ownership of his shares in the company. As a partner in the claimant’s law firm, L, on behalf of the defendant, sent a proof of debt valued at over £237m. The administrators rejected the proof.
The claimant applied to the court for an order that the defendant be removed as trustee and replaced by the administrators, or some other trustees. Although the court had power to remove a trustee under s41(1) of the Trustee Act 1925 (Trustee Act), such an application could only be made by a trustee or a beneficiary (s58 of the Trustee Act), and the claimant was neither. The order was therefore sought under the court’s inherent jurisdiction.
Held:
- 1) The defendant’s role as a security trustee had features in common with a trustee of a special trust and neither of the parties suggested that different principles applied when the court was dealing with an application to remove a security trustee, as opposed to the trustee of a specialised trust. The bondholders were entitled to have complete confidence that the trustee would treat their interests as being paramount.
- 2) The defendant was removed as trustee. Although the exercise of the court’s inherent jurisdiction to remove a trustee was exceptional, in the sense that it was not a jurisdiction that was commonly exercised, there was no basis for adding a threshold test of exceptionality or a requirement that a strong case must be made out if the application was made under the inherent jurisdiction. The court would always wish to consider the application in light of all the circumstances, with the welfare of the beneficiaries firmly in mind; if there had been misconduct by the trustees, it was likely that an order for removal would be made, but the fact that the beneficiaries had fallen out with the trustees was likely to be insufficient on its own. The court removed the defendant as trustee on three grounds:
- a) Conflicts of interest: In the circumstances, there was a failure on the part of the directors of the defendant to appreciate the importance of ensuring that the defendant and its directors were not tainted by association with the claimant and its directors, with companies that borrowed from the claimant and with those who had received substantial sums personally from the claimant.
- b) Utility: As trustee, the defendant had three express obligations under the debenture: to alert the bondholders of an event of default; to enforce the security; and to distribute the proceeds that were recovered. There was also a question whether the defendant had a residual role, once the administrators had been appointed. The defendant should have applied to the court for guidance about the exercise of its functions at the earliest opportunity but did not do so, even though this possibility was raised by counsel.
- c) The wishes of the bondholders: There was powerful evidence that many of the bondholders were concerned that no person or entity that was tainted by association with the former management of the claimant should have any further involvement and that they did not want the defendant to play any further part. Although the wishes of the bondholders constituted only one factor to be taken into account, they weighed heavily in the balance.
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