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Dishonesty and Professional Trustees

Author: Nicola Sharp  12 May 2023
4 min read

Nicola Sharp of Rahman Ravelli assesses fraudulent breaches of trust and what amounts to ‘dishonesty’ for professional trustees. 

The recent High Court case of Carey Street Investments Limited (in liquidation) and (2) 245 Blackfriars Road Property Investments Limited (in liquidation) v (1) Grant Timothy Brown and (2) Equity Trust (Jersey) Limited [2023] EWHC 968 (Ch) is useful from a civil fraud perspective, as it gives guidance on how to determine whether or not a breach of directors’ and professional trustees’ duties is fraudulent.

The case

Carey Street Investments was a case of alleged tax evasion. The claimant companies, CSI and BRP, accused Grant Brown of breaching his directors’ duties and trustees’ duties in order to avoid various tax liabilities on behalf of the claimant companies. Mr Brown is a chartered accountant and a director and professional trustee of both claimant companies.

This was not a textbook case of civil fraud. In ordinary circumstances, the claimants would most likely have sued for breach of directors’ duties. In fact, in earlier proceedings, that is exactly what happened. A related entity, Angelmist Properties Limited, through its liquidators, brought a claim against Mr Brown and Equity Trust in July 2012 in respect of the transfer of another property, Sampson House. That claim was within the relevant limitation period and so there was no requirement to show that any breach of duty was fraudulent.

However, the alleged breaches in Carey Street Investments took place between 2004 and 2006 and the claim form was not issued until 2020. In these circumstances, the claim was time barred. By pleading ‘fraudulent’ breach of directors’ duties, the claimants were able to run the case, relying on section 21 of the Limitation Act 1980 which disapplies the limitation period in circumstances of a fraudulent breach of trust.

Mr Brown was accused of:

  • Transferring two properties at undervalue, with a view to evading corporation tax on capital gains payable by the claimant companies.
  • Allowing a proportion of the purchase price for one of the properties to remain outstanding as a debt.
  • Authorising a dividend on the basis of defective accounts, in a further attempt to evade tax on the part of a claimant company.
  • Preparing disingenuous management fees that were a deliberate device to reduce the corporation tax payable by one of the claimant companies.
  • Taking the decision to charge interest on a loan as a device to reduce the corporation tax liability of a claimant company.

In order for these breaches to fall within the ‘fraudulent’ category, they needed to meet the test set out by Millett LH in Armitage v Nurse [1998] Ch 241. The key principles of this test are:

  • Fraud means dishonesty. This “connotes at the minimum an intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interest of the beneficiaries or being recklessly indifferent whether it is contrary to their interest or not.”
  • It is not necessary that the trustee should stand to gain personally. It is enough that they intend to benefit someone who is not the object of the trust.
  • A deliberate breach of trust is not necessarily fraudulent.

The High Court’s decision

In relation to the transfer of the properties, the High Court held that Mr Brown did not believe that the market value of the properties was higher than their sale price; nor did he have ‘blind knowledge'. While he did not get an independent valuation to confirm his position, he did not consciously decide to refrain from doing so.  

In relation to the payment of interest and management charges, the High Court held that these charges were genuinely in consideration of suitable services and that Mr Brown considered the fee appropriate. They were not simply a device to reduce the company’s corporation tax liability.

The High Court criticised Mr Brown for not giving more thought to certain decisions. In the court’s view, it was clear that Mr Brown had taken shortcuts and did not fully investigate matters which should have been considered in more detail.

But despite these criticisms, the breaches were not found to be fraudulent. Mr Brown did not knowingly or recklessly act contrary to the interests of the claimant companies. Any breach of his duties was, therefore, not fraudulent within the meaning of section 21 of the Limitation Act 1980.

Analysis

This case touches on one of the surprising aspects of fraudulent breach of duties – that the defendant does not need to gain personally from his breaches for fraud to be a viable pleading. It is enough that the trustee intends to benefit someone who is not the object of the trust. It was never suggested that Mr Brown stood to benefit personally in any way from the transfers of property at undervalue. Instead, it was suggested that his motivation to act ‘fraudulently’ was a desire to assist the claimant companies in evading tax.

The case serves as a reminder to professional trustees of the high standards expected of them. The High Court found that Mr Brown was in breach of his duties. However, it may come as a relief to other professional trustees that the accusations of fraud were not upheld. ‘Dishonesty’ is still a key element to fraudulent breaches of trust - and while some criticisms against Mr Brown were justified, they were considered to be a failure to take proper care rather than dishonesty.

The court was pragmatic when it came to assessing Mr Brown’s potential motivations to act dishonestly, and found it was “inconceivable that, as suggested by the claimants, Mr Brown would put his career and his reputation on the line for the client by dishonestly assisting CSI to evade tax.”

While there have been cases in the past which show that some professionals are willing to act dishonestly in order to benefit their clients, this is rare. In the absence of any evidence of a reason for professional trustees to act dishonestly, there would need to be strong evidence supporting an inference that they had done so. 

Nicola Sharp C 09983

Nicola Sharp

Partner

nicola.sharp@rahmanravelli.co.uk
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Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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