Appleby Corporate Services v Citco Trustees 17 ITELR 413

WTLR Issue: April 2016 #158





In March 2000 a settlor transferred about US$10m to a company registered in the British Virgin Islands (BVI). In December 2000 the settlor then settled the entire issued share capital of the company upon a BVI discretionary trust. The beneficiaries of the trust were the settlor’s wife and children and the trustee was the defendant company. The trust deed gave the defendant all the powers and immunities set out in what is now the Second Schedule to the Trustee Act (BVI). On the same day in December the defendant and the company entered into an investment management agreement with a firm of independent financial advisers, Consultatio. The effect of the investment management agreement was to give authority to Consultatio to manage the company’s investment portfolio at is complete discretion, but within the terms of a Limited Trading Authority.

In June 2005 Consultatio was replaced by a different financial adviser, Global. A monthly statement provided to the defendant by Global in June 2005 stated that the net asset value of the company’s portfolio was US$7.3m. Between June 2005 and July 2011 Global provided the defendant with further monthly statements, which showed that the portfolio was substantially decreasing in value and was not being invested in accordance with the Limited Trading Authority. By July 2011 the portfolio was worth about US$142,000.

In July 2011 the defendant was replaced as trustee by the claimant company. The claimant, acting as trustee, brought proceedings against the defendant, alleging that, inter alios, the defendant had failed to monitor Global’s performance, failed to check whether the Limited Trading Authority was being adhered to, and failed to review the performance of the company’s portfolio. The claimant claimed the loss of the portfolio’s capital value, the loss of the corresponding net income, and unnecessary fees incurred as a result of churning.

Held (giving judgment for the claimant):

1) The effect of the investment management agreement was a delegation by the defendant, as well as by the company, of management of the trust’s assets within para 4(q) of the second schedule of the Trustee Act or s24 of the Trustee Act.

2) The defendant, as trustee, was under a duty to have in place appropriate risk management procedures in order to be able to satisfy itself that delegated powers and functions were adhered to and not abused by the agents to whom they were delegated. Further, the defendant, as sole owner of the company, being the only asset of the trust, had a duty not only to respond to information giving cause for concern about the management of the company’s assets, but also to inform itself at appropriate intervals on the state of the company’s portfolio and the manner in which it was being managed.

3) Had the defendant reviewed the conduct of the portfolio on a systematic basis, it would have seen, quite early on after the changeover to Global had taken place and without needing to deploy more than ordinary business acumen, that the investment guidelines were not being adhered to. Moreover, it was not difficult to see over a relatively short period that the investment activity was steadily eroding the value of the company’s assets and thus of the shares which formed the trust fund. Unless it could rely on some exonerating provision, the defendant would therefore be liable to the trust for whatever damage was proved to have been caused by its negligence in failing to keep the management of the portfolio under appropriate regular review.

4) The defendant was not exonerated by clause 4(q) of the second schedule of the Trustee Act, s31(1) of the Trustee Act, the trust deed, or the deed or retirement and appointment pursuant to which it was replaced as trustee by the claimant. In particular, s31(1) of the Trustee Act protects an innocent trustee from vicarious liability for the defaults of others, but leaves the trustee liable for the consequences of its own defaults. The section did not therefore assist the defendant where the claimant sought to make it liable for its own default in failing to exercise reasonable prudential oversight over the handling of the trust’s assets, but not for Global’s defaults.

5) Had the defendant not breached its duties, it was reasonable to suppose that it would have terminated the investment management agreement no later than 28 February 2006. That would have had the effect of freezing the portfolio at that date, when it would have had a value of US$6,267,188. The defendant would be liable to reinstate this fund, subject to such deductions for proven subsequent events (such as distributions) as are required to be made. The defendant would also be liable to pay simple interest on the sum of US$6,267,188, as reduced from time to time by intervening distributions and withdrawals, from 1 March 2006 until judgment. The defendant would not be liable for any further sum as it was not responsible for the performance of the investments and it was impossible to say how the fund would have performed after 1 March 2006 in the hands of whoever had been engaged as a replacement investment manager.

BANNISTER J: [1] In these proceedings, the current trustee of a British Virgin Islands (BVI) discretionary trust asks for an order requiring the former trustee (in effect) to reconstitute the trust fund by compensating the trust for losses which it claims were suffered by the trust as a result of the negligence of the former …
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Counsel Details

Michael Heywood (Redcliffe Chambers, 11 New Square, Lincoln’s Inn, London WC2A 3QB, tel 020 7831 0081, email and Andrew Willins (Appleby, Jayla Place, Wickham’s Cay 1, PO Box 3190, Road Town, Tortola VG1110, tel +1 284 393 5323, email for the claimant. Shân Warnock-Smith QC (Five Stone Buildings, Lincoln’s Inn, London WC2A 3XT, tel 020 7242 6201, email, Kissock Laing (Supreme Court of Jamaica, Barry St, Kingston, Jamaica) and Jeremy Child (Harneys, Harney Westwood & Riegels, Craigmuir Chambers, PO Box 71, Road Town, Tortula, British Virgin Islands VG110, tel +1 284 494 2233, email for the defendant.

Legislation Referenced

  • Trustee Act (British Virgin Islands), s24, s31
  • Trustee Act 1925, s30
  • Trustee Act 2000