Rupert Morris
Partner
Guernsey
A common structure in international wealth planning involves the settlement of assets into a trust, with the trustee holding those assets not directly but through one or more underlying companies. In many offshore and private wealth arrangements, a trustee will be the sole member of a company which in turn holds the substantive trust assets, for instance, a valuable parcel of real estate. This layered structure raises important questions about the scope of the trustee's duties, particularly when a settlor who is also the primary beneficiary requests that the property be sold. This article examines the trustee's obligations in such a scenario, with particular reference to the Bartlett duty and the effect of the so-called 'anti-Bartlett' clauses.
The Bartlett duty: active supervision of controlled companies
The foundation of this area of law is the principle articulated in Bartlett v Barclays Bank Trust Co. Ltd [1980] Ch. 515 and now commonly referred to as the 'Bartlett duty'. Where a trustee holds a shareholding large enough to confer control of a company, or a substantial measure of control, rather different considerations apply from those governing a small investment portfolio.
First, it is not enough for the trustees to leave the running of the company wholly to the directors. They are under a duty to keep themselves informed about the company's affairs and the directors' plans for the future. They may arrange to receive a report from the board at regular intervals, or they may themselves appoint a representative to the board.
Second, the trustees must be willing to act on the information so provided and will be liable for breach of trust if, for example, they fail to prevent the dissipation of the company's assets in a speculative and ill-considered venture.
Third, where all or a substantial part of the trust property is represented by a controlling holding in a limited company, the trustees are bound to see that the company's assets are administered cautiously (though the precise scope of this duty is not wholly settled and the position may be different where a controlling holding is only a minor part of the overall trust assets). The interposition of a limited company should not of itself make a difference to the responsibility of the trustees. This is a critical point, a trustee cannot shelter behind the corporate veil in order to disclaim its trust law obligations.
Fourth, the trustees may exercise their control, if necessary by removing directors, so as to require the board of the company to adopt a course consistent with the trustees' view of the interests of the beneficiaries of the trust. However, directors owe their duties to the company and it is not open to the trustees to force on the board a course of action contrary to the law under which those duties arise.
It is important to appreciate, however, that these two sets of duties are in practice complementary rather than conflicting, particularly in a sole-member structure. The duty of the trustee to act in the best interests of the beneficiaries sits alongside the duty of the directors of the underlying company to act in the best interests of the company. Where the trustee is the sole member of the underlying company, the interests of the company are, for all practical purposes, the interests of the trust and hence the interests of the beneficiaries. The chain runs as follows:
- the directors owe their duties to the company;
- the company's sole member is the trustee; and
- the trustee owes its duties to the beneficiaries of the trust.
In a sole-member structure, the two sets of duties run in parallel and reinforce each other: what is good for the company is, for practical purposes, good for the trust and hence the beneficiaries. The trustee cannot force the directors to act contrary to the law under which their duties arise, but equally the directors cannot manage the company against the interests of its sole member.
The Anti-Bartlett clauses: scope and limitations
Given the onerous nature of the Bartlett duty, professional trustees in particular are reluctant to accept a controlling shareholding in a company as a trust asset without suitable protections. It has therefore become common for professional trustees to include in the standard terms on which they accept trusteeships a clause limiting any duty to enquire into or interfere in the conduct of a company, or to supervise directors. There are many forms of such an 'anti-Bartlett' clause.
To be effective, any such clause must be contained in the trust instrument. It will not be enough for it to be contained in a trustee's standard terms and conditions unless they are in some way incorporated into the trust instrument. If the clause is expressed only as a power to leave the conduct of the company's affairs to the directors, it must be exercised for the benefit of the beneficiaries, and the trustee will not be able to rely on it if he never gave any thought to the question whether he should exercise any control.
More usually, the clause will exclude what would otherwise be the trustee's duty to enquire and supervise. Such a provision is not an exemption excluding a liability; rather, it restricts the duties owed by the trustee, so that the trustee commits no breach by acting in accordance with its restricted duties. It has been held, however, that an exclusion of any duty to supervise or interfere in the management of the company will not effectively exclude the trustee's duty to enquire, that is, to satisfy itself that nothing untoward is affecting the value of the trust's shareholding.
Moreover, if the clause relieves the trustee of any duty of enquiry only unless it has knowledge of circumstances calling for enquiry, the protection is limited to excluding the preliminary duty of keeping abreast of the company's affairs. If the trustee does become aware of circumstances calling for enquiry, no protection is given thereafter should it remain supine. In other words, knowledge is a trigger: once the trustee knows something may be amiss, the anti-Bartlett clause ceases to provide a shield.
Application to the scenario: selling real estate at the settlor's request
In the scenario noted at the start, the settlor (who is also the primary beneficiary) asks the trustee to sell a significant asset, real estate held by an underlying company which is wholly owned by the trustee as trustee of the trust. Several distinct questions arise.
Can the trustee simply 'sit on its hands' after informing the directors?
The answer, in the absence of a comprehensive anti-Bartlett clause, is clearly no. The Bartlett duty requires the trustee not merely to pass on the request to the directors but to keep itself informed of the progress of the sale and to take active steps to ensure that the directors discharge their functions appropriately. The trustee must be willing to act on the information provided and cannot passively await developments in the proposed transaction.
Even where a clause comprehensively excludes any duty to supervise, interfere or make enquiries, the trustee will still have the practical ability to do so by virtue of its control of the company. The Hong Kong Court of Final Appeal in Zhang Hong Li v DBS Bank (Hong Kong) Ltd [2019] HKCFA 45 firmly rejected the argument that a residual or high-level duty to act survives a broad anti-Bartlett clause, although the point remains untested at the highest level under English law. In any event, once the settlor-beneficiary has made a specific request and the trustee has engaged with the transaction, it will be difficult for the trustee to contend that it had no duty to follow it through.
Duty to ensure the best possible price
The trustee's overarching obligation is to preserve and manage the trust property for the benefit of the beneficiaries. Where all or a substantial part of the trust property is represented by a controlling holding in a company, the trustee is bound to see that the company's assets are administered with care and skill, prudence and diligence. This extends to ensuring that a sale of a major asset such as real estate is conducted prudently and that the directors obtain the best price reasonably achievable.
The trustees may exercise their control so as to require the board of the company to adopt a course consistent with the trustees' view of the interests of the beneficiaries. If the trustee believes that the directors are about to sell the property at an undervalue, it is not merely entitled but obliged to intervene. An anti-Bartlett clause in ordinary form is unlikely to protect them if they fail to do so.
Practically, this means the trustee should satisfy itself that the property is properly marketed, that professional valuations are obtained and that the sale price reflects market value or better. The trustee should instruct or at the very least require the directors to obtain independent valuation advice and should review the terms of any proposed sale before the directors commit the company.
Conflicts of interest: trustee and directors from the same group
A particular concern arises where the trustee and the directors of the underlying company are associated with the same group of companies, as is common in offshore structures where the holding company is administered by the trustee, its directors being officers or employees of the trustee. Even if the Anti-Bartlett clause relieves the trustee of any duty to interfere, it will afford no protection if the trustee does not stand aloof from the company. A corporate trustee which supplies employees as directors of a company held by the trust will have chosen to conduct its affairs and may be liable accordingly. An anti-Bartlett clause in ordinary form will then potentially provide little protection for the trustee.
This is of direct relevance to the above scenario. If the trustee's own officers or employees sit on the board of the underlying company, the trustee cannot claim ignorance of the company's affairs or disclaim responsibility for the conduct of the sale. The anti-Bartlett clause, even if present, will not insulate the trustee from liability if the sale is conducted negligently or at an undervalue. The trustee may find it difficult to distance itself from decisions taken by directors who are its own officers or employees, particularly where information and decision-making are effectively shared across the group.
Moreover, the directors of the company held by the trustee may be liable to the company for breach of their duties as directors. A beneficiary may seek to compel the trustee to use its control to procure the company to sue its directors, a claim to which an anti-Bartlett clause may be no answer in a position of conflict of interests. This is a further reason why the trustee must take care to ensure that the directors discharge their functions properly.
There is also a broader consideration. If the settlor wishes to retain control of the trading company or the underlying asset, the trust instrument may contain more sweeping clauses imposing a positive duty on the trustees not to interfere in the management of the company, perhaps with a provision for the settlor or a protector to give binding directions as to the exercise of the trustee's rights as shareholder. But even in such circumstances, if the powers to give directions are fiduciary, and those powers are abused, the trustee may continue to owe a duty to bring the matter before the court.
Additional obligations and practical considerations
Beyond the duty to supervise the sale and to manage conflicts, the trustee should be alive to the following additional obligations.
The Bartlett duty is concerned with the proper management of a company held or controlled by trustees. Even an anti-Bartlett clause in wide terms may not protect a trustee who fails to safeguard trust assets against misappropriation, at any rate where the trustee has grounds for suspecting that misappropriation is taking place. If a trustee has actual notice of possible misconduct or misappropriation within the company, the trustee, notwithstanding an anti-Bartlett clause, has a duty to take reasonable steps to ensure that it can investigate what has occurred and ensure an adequate information flow in future. This principle was applied in Ivanishvili v Crédit Suisse Trust Ltd [2023] SGHC(I) 9, where the Singapore International Commercial Court held that a trustee who had admitted a breach of its duty to safeguard trust assets could not rely on an anti-Bartlett clause to escape liability for losses caused by employee fraud and misappropriation (see also Re Alpha, Beta and Delta Trusts [2023] JRC 138, in which the Royal Court of Jersey held that a trustee with actual notice of possible misconduct must take reasonable steps to investigate and ensure an adequate information flow).
Finally, a general consideration against reliance on anti-Bartlett clauses is the relevant jurisdiciton's money laundering or other financial crime legislation. Should a company be engaged in criminal conduct, the definition of which can be extremely wide, and the trustee has shut its eyes to what is going on, the trustee may commit an offence.
Conclusion
In the scenario described above, a trustee cannot simply relay the settlor-beneficiary's request to the directors and consider its job done. The Bartlett duty, unless effectively and comprehensively excluded by the trust instrument, requires the trustee to supervise the sale, to ensure that the directors obtain the best price reasonably achievable and to intervene if the directors are failing to act in the interests of the beneficiaries. Where the trustee and the directors are drawn from the same corporate group, reliance on an anti-Bartlett clause may become significantly more difficult, particularly where the trustee has involved itself in the management of the company or has knowledge of matters requiring intervention.
The trustee's obligations are extensive and a failure to discharge them may give rise to a claim for breach of trust.
Trusts holding assets through underlying companies remain a common feature of international wealth structures. Whether acting as trustee, director, settlor or beneficiary, it is important to understand how anti-Bartlett provisions operate in practice and where their limits lie. We advise trustees, family offices and private clients on trustee duties, governance arrangements and the drafting and effectiveness of anti-Bartlett provisions across a range of trust structures.
