24th February, 2021
How to remove a trustee – conflicts of interest and the correct way to protect a beneficial interest
The High Court has recently handed down judgment in Manton & others v Manton  EWHC 125 (Ch), concerning the removal of a trustee from a family trust, following an unfortunate but all too common falling out between one sibling and his parents and fellow siblings.
The parties to the claim were both trustees and directors of the family company “IDD”, whose shareholding was the principle asset of the family discretionary trust, which they were all also beneficiaries of. Following a serious disagreement as to the direction of IDD, the defendant and his wife set up a separate company, “IDE”.
The claimants alleged that the IDE, by diverting customers from IDD, was in direct competition and therefore causing IDD loss, and by extension, the trust. The claimants, therefore, sought the defendant’s removal from IDE.
Pausing here, there is nothing inherently wrong with a trustee, to be a director of a company, held in trust, as well as be a beneficiary of that trust. This is on the proviso that the trustee must guard against conflicts of interest: specifically, they must not put themselves in a position where a personal interest conflicts, or crucially, may conflict, with their duty as a trustee. This is a well-established principle.
In the court’s eyes, rarely should an application to remove a trustee require a trial of disputed facts, however, speaking from my own practice and experience, unfortunately, it can happen.
In this case, the trial lasted over five days.
Ultimately, the court found that IDE acted in direct competition with IDD and therefore that the defendant put his own personal interests, over that of IDD, the trust and its beneficiaries.
Curiously, the defendant’s principle defence was that if he was removed, the remaining trustees would overturn a previous decision to pay income from the trust to him, and worse, could remove him and his family as beneficiaries of the trust.
While the court understood that concern, the argument was misguided, as it was effectively being asked to allow a trustee to remain in a position of conflict, just in case something may happen to alter their beneficial interest it the future. In fact, the court took the view that the argument was an extension of the defendant, as trustee, putting his personal interests ahead of his fiduciary duties to all of the beneficiaries.
Pertinently, if the defendant’s worst fears arose, the court recognised that the defendant had the ability to protect his potential interest by seeking the court’s assistance, if he felt that the potential future exercise of the remaining trustees’ discretion was improper.
The court’s decision reaffirms a trustee’s need to consider the interests of the beneficiaries, as a whole, not simply a part. For trustees, beneficiaries and practitioners alike, it is important to bear in mind the appropriate way to protect beneficial interests: in this case, the court overwhelmingly disapproved of the defendant’s attempt misuse the powers provided to him as trustee to seek to protect his beneficial interest.
Contested Wills, Trusts & Estates
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