In this paper “Life in the old dog yet?” Elizabeth Weaver and Timothy Sherwin look at dog-leg claims and whether the time has come for them to be recognised.
The dog that didn’t bark in the night
- Aside for material for cracking puns, the so-called “dog-leg” claim seems to have little to offer the modern trust litigator. A series of decisions has put the claim down humanely. It is now trite to say that a beneficiary does not have standing to bring proceedings against directors of a trustee company.
- However, in this paper we suggest that, first, the door to the dog-leg claim may not be as firmly shut as may first appear; and, secondly, that recent decisions in other, connected, legal fields may point to a greater willingness on the part of the courts to allow beneficiaries to access a remedy against errant directors of trustee companies. We do, though, emphasise that the space for such claims is limited, and the hurdles for claimants remain high. Before turning to that analysis, however, we look at why it is that a dog-leg claim may be desirable, and why it seems not to work.
A dog in search of a juicy bone
- It is very common in modern trust structures for the trustee to be a corporate person rather than an individual. Such trustee companies tend to come in one of two forms : a private trust company, known as a “PTC”, which is, typically, a special purpose vehicle created specifically for the purpose of acting as trustee of the particular trust structure; or a large professional trustee company, which will often act as the trustee of several trust structures which are unconnected save for the identity of their trustee, and which we shall call a “Professional TrustCo”.
- In the case of PTCs, it is common for the directors to be either professional individuals from the fiduciary services industry, or, perhaps more usually, a mixture of such individuals and other individuals connected to the settlor and the family, whether trusted advisers or family members. In the case of Professional TrustCos, the directors are, of course, industry professionals.
- Such PTCs and Professional TrustCos provide numerous benefits to settlors, and, indeed, to beneficiaries. They provide a means by which expert professionals can administer the relevant trust. Instead of requiring a change of trustee when such individuals retire or move on, however, the trustee company can stay in office and the individuals retire and be replaced as directors. Continuity is thereby ensured; and there is no problem over having to vest assets in new trustees each time one retires. Further, PTCs and Professional TrustCos are often situated in jurisdictions with attractive fiscal regimes, and can stay there.
- However, it is well established that a professional trustee owes an enhanced duty of care to act with the special skill and care with which he or she holds himself or herself out as possessing: Bartlett v Barclays Bank Trust Co Ltd  2 WLR 430, 443-445. It is also a matter of common experience for trust litigators that beneficiaries often wish to seek recourse against their trustees when things go wrong, as in Bartlett v Barclays Bank Trust Co Ltd That creates a problem of risk for professionals, namely how to ensure that the professionals are not liable to direct claims from the trust beneficiaries which the trustee company model tries to solve by placing the individual into a corporate structure so there is no direct relationship with those beneficiaries.
- Before going on to look at that in detail, we should highlight one point which will make all the issues considered in this paper academic in the majority of cases where beneficiaries are contemplating action against their trustees. That is the extremely widespread use of exoneration and exculpation clauses in professionally drawn trust instruments, which, following the decisions in Armitage v Nurse  Ch 241 and Spread Trustee Co Ltd v Hutcheson  2 AC 194, are effective to exonerate trustees from any liability, or exclude liability from ever arising, save in cases of fraud (or, in certain jurisdictions, such as Jersey or Guernsey, gross negligence). As a result, it is in fact unusual for beneficiaries to have any recurse against trustees, professional or otherwise, unless fraud or gross negligence can properly be alleged (and, of course, proved). Those clauses tend, in our experience, to extend to officers and agents of trustee companies.
- That said, there are cases where such exoneration or exculpation clauses are either absent, or expressly leave open claims based on negligence or breach of fiduciary duty, or indeed are badly drafted so that their effect is heavily reduced. Thus, beneficiaries may well find that they are not debarred by the trust instrument from seeking recourse in the event of wrongs falling short of dishonest conduct (or gross negligence). The beneficiary who considers that he or she has a claim in such a case may well wish to target the directors of the trustee company.
- That is because the company itself may be worthless to pursue. PTCs in particular rarely have substantial assets of their own against which a judgment can be enforced. Similarly, a removal claim against a PTC, or a Professional TrustCo may be a lengthy, costly, and ultimately risky exercise unless breach of fiduciary duty can be proved, where the court will be slow to remove a PTC personally set up by the settlor, or a Professional TrustCo of long experience and established record, always assuming that an acceptable trustee can be found who is willing to act in what may be a very acrimonious situation.
- The beneficiary thus turns his or her eyes to the directors, and, perhaps even more attractively, to their professional indemnity insurance policies. Such individuals present a tempting target.
The dog-leg broken
- Unfortunately for the beneficiary, it is at this stage that the courts have tended to draw a line. In simply terms, the problem is that the director of the trustee company owes no duty of any sort to the beneficiary of the trust. He or she owed his or her duties to the company alone. The company is not a trust asset. Neither, on the face of it, is the cause of action: on a conventional analysis, the company’s cause of action would be to remedy damage to the company resulting from the wrong-doing director’s breach and any recoveries would therefore belong to the company. Thus, there is no space for a beneficiary to bring a claim. Let us look at those principles, and the key cases, in more detail.
- The starting point is HR v JAPT  Pens LP 99. That was an archetypal case. The trustee was a PTC. It entered into certain transactions which allegedly caused loss to the trust. It had no assets, and so the beneficiaries sought to join two directors as defendants. One of those directors sought to strike out the claim. It is the source of the phrase “dog-leg” claim to describe attempts to establish direct liability between the beneficiary (or a successor trustee) and the director of the trustee company, going around, rather than through, the company (see ).
- Lindsay J concluded, first, that “directors, even of a trust company, are not, as such and without more, in a fiduciary position in relation to the beneficiaries of a trust of which their company is trustee” (at ) because “[t]here is a broad principle […] that the directors of a trust company stand in a fiduciary position only to the company itself not to strangers dealing with the company and not even where the stranger is able to describe himself as a beneficiary of a trust of which the company is trustee”. Thus, there is no basis for a beneficiary claiming in breach of fiduciary of duty against a director of a trustee company.
- The judge did make the point, second, that there may be circumstances where a director steps out of his role qua director and engages personal liability for actions which go beyond those of the company. “Although the line is hard to describe and will sometimes be hard to see, I do not see [the director] as here over-stepping the line between the area in which identification of a director’s acts with his company is the basic premise and that area in which it can be recognised that the director’s acts involve an assumption of personal liability” (at ).
- Next, the judge dealt with an allegation of dishonest assistance by the director in the trustee company’s breach of trust. He allowed that part of the claim to proceed to trial (at ). That is uncontroversial. Acts of dishonesty engage accessory liability (whether under the doctrines of knowing receipt or dishonest assistance, or via the economic torts such as unlawful means conspiracy), which give the beneficiary the ability to claim against those who do not stand in direct fiduciary or tortious relationships with him or her. And, of course, if proved, they take the claim outside the scope of even the widest drawn exoneration or exculpation clause. But they do not require so-called dog-leg claims; they are available as a matter of general principle.
- Finally, Lindsay J considered an argument that “[h]ere the claims, both in tort and as a matter of fiduciary duty, are that [the director], with another or others, owed a duty of care to the Former Corporate Trustee, that he breached that duty, that thereby the Former Corporate Trustee suffered loss (in that it is obliged to make good a deficit to the Scheme) and that the chose in action against [the director] thus acquired by the Former Corporate Trustee is trust property…” (at ). That suggestion was drawn from Royal Brunei Airlines v Tan  2 AC 378 where Lord Nicholls noted, obiter, that breaches of duty on the part of advisers and agents of trustees gave rise to rights which “form part of the trust property. As such they can be enforced by the beneficiaries in a suitable case if the trustees are unable or unwilling to do so”.
- This was the part of the case which gave the judge most difficulty. He concluded at - that:
“Whether a particular chose in action is or is not a trust asset involves no contest involving high principles and great authorities but rather an examination of the particular facts of the particular case. […]. Given that there were no separate assets or business in the Former Corporate Trustee and given the one-trust nature of the Former Corporate Trustee which I shall not enlarge upon yet again there is, in my view, a stronger case than may be common […] for seeing a right of action against directors of the Former Corporate Trustee to be trust property.
No doubt problems will arise in the course of such ‘dog-leg’ claims. Is the duty falling upon [the director] to be measured, asks [counsel], against the yardstick of his being a director or the different one of his being a trustee? I would have thought the answer plain as he is liable to the Former Corporate Trustee only as its director. However, the point is only likely to be of significance if he would be liable, if at all, only if judged by the more exacting of the two; it is a difficulty which may arise on particular facts but which I see no need to anticipate. [Counsel] also argues that to allow such claims to go forward exposes individual directors of trust companies to claims as to which they may have thought themselves immune and may discourage persons from accepting office as directors. But it is only if the trustee company is insubstantial or uninsured that individuals are likely to find themselves pursued; if all that is discouraged is the use of insubstantial or uninsured trust companies that would be a discouragement many might think timely enough. In summary, I am not prepared to describe the Plaintiffs’ ‘dog-leg’ claims as unarguable.”
- In reaching that conclusion, the court approved at  to  comments from a decision of the Court of Appeal of Victoria Young v Murphy  13 ACSR 722 that, in that case, “[t]he right of action held by the former trustee cannot be shown to have been trust property; there is no basis upon which to conclude it was. […] [T]he directors cannot be said on the pleading in this case to have owed their duties to the company only in relation to some particular trust or trusts; nor were those duties imposed upon them in relation to some particular item or items of trust property as such. Rather the existence of both the trusts and the trust property was but the context in which the duties fell to be discharged by those who owed duties to the company generally as its officers” (at 746). That suggested that, where the actions complained of involved a particular trust or trusts and/or particular items of trust property, the cause of action may itself become trust property.
- Permission was thus granted for the claim to go to trial. It settled, however, and the points of principle were not argued out in any greater detail. That left the “dog-leg” claim in limbo; injured, but not perhaps broken. The court had left open the possibility that such a claim could be brought by a beneficiary if the trustee company’s claims against the director could be said to be “trust property”.
- Further damage was done to the “dog-leg” in Alhamrani v Allhamrani  JLR 44. The claimant beneficiaries had brought claims against the directors of trustee companies in reliance of a repealed provision of the Trusts (Jersey) Law 1984 that made directors guarantors of pecuniary damages and costs awarded against trustees in breach of trust claims. They sought to amend their claim to bring a “dog-leg” claim on the basis that the duties owed by those directors to the trustee companies were trust property. The court characterised the issue at  as being “whether the right to performance of a director’s statutory duty of care, diligence and skill to his company and any right to damages arising from breach of that duty can, so far as performance of that duty involves the affairs of the trust, properly be regarded as “trust property” rather than as an asset of the trust company itself which would be available for the benefit of the creditors of that company in the event of its insolvency.”
- The Royal Court considered first that reliance on Royal Brunei was a dead-end:
“The point is that, in the examples given by Lord Nicholls, the people said to be accountable are external to the trustee and have been retained to perform some service for, or have otherwise become involved in some dealing with, a particular trust or trust asset in a way that renders them potentially liable as accessories to a breach of trust by the trustee: they are not those who constitute the directing mind and will of the trustee itself, the board of directors. […]. The question is whether the right to performance of duties stemming from that source can, in the ordinary way, sensibly be regarded as an asset of the trust rather than something belonging to the company in its own right” (at ).
- Next, the court noted that “[t]wo further considerations militating against a claim of this kind are, however, also noted: first, that a dog-leg claim if successful would completely reverse the effect of the principle that a director does not automatically owe any duty to the beneficiaries; and secondly, that it could result in a director being held liable although the company was not, in circumstances where exculpatory provisions in a trust deed avail the company but not its directors” (at ).
- Those points were not in the event dispositive, powerful though the court obviously found them. The key issue was “the wholly unexceptional nature of the facts pleaded in the present case, unlike those in HR v. JAPT. It is not averred that either defendant is a one-trust company (and, as far as I am aware, this is indeed anything but the case) and, although [the advocate] suggested in argument that “it may be doubted” whether [the trustee companies] have adequate insurance or other assets to meet the first party’s claims in full, nothing to this effect is pleaded and there is no evidence to this effect; the sole duty alleged to have been owed by [the directors] is the ordinary statutory one owed by any director to his company; and no other special factors of any kind are said to arise beyond the allegation that [the directors] were the directors who had the conduct of the affairs of the relevant trusts on behalf of their respective companies” (at ).
- That was a fortiori where “it would introduce subtleties of interrelationship between trust and company law that can only lead to uncertainties of a kind that principals, insurers and advisers, as well as the law itself, could do without. And the mere fact that a director may have had particular responsibility for the affairs of a particular trust cannot, in my view, be sufficient to displace the fundamental nature of a director’s statutory duties to his company or justify any equivalence with the sort of exceptional circumstances that existed in HR v. JAPT: certainly not in a case such as the present where there is no suggestion that the responsibilities of directors were confined exclusively to the trusts in question” (at ).
- The amendment was not allowed; and the scope for beneficiaries arguing that the trustee company’s cause of actin against its directors was “trust property” appeared to have narrowed to “exceptional circumstances” or cases involving “special factors” such as, at least, single trust PTCs without assets or insurance, where the director in question had special responsibility for administering the trust or trusts in question.
- The dog-leg was finally more or less broken by Robert Miles QC (as he then was) in Gregson v HAE Trustees Ltd  Bus LR 1640. That was a case where the trustee company administered several family trusts, and a beneficiary claimed against the company and its directors when the trust assets became worthless. The claim was squarely put on the basis that the claims had become trust property, such that the beneficiary could sue on them.
- The judge first rejected reliance on the dicta from Royal Brunei at . “The decision in the case was, of course, that the director could only be liable as an accessory to the trustee’s breach if he was shown to be dishonest. If Lord Nicholls had thought that the duties of the defendant, as a director of the trustee, were held on trust for the claimant there would have been no need to establish dishonesty. Negligence would have done.”
- He then went on to point out, like the Jersey court, that the “dog-leg” claim is an attempt to circumvent the basic corporate principles that prevent liability being owed to beneficiaries: “[t]he dog leg claim, if valid, would, for all practical purposes, circumvent the clear and established principle that no direct duty is owed by the directors to the beneficiaries. The refusal of the law to accept that directors of a trustee company owe a direct duty to safeguard the assets of a trust of which it is trustee is, I consider, a powerful reason to doubt that directors may be liable to the beneficiaries of the trust by the indirect, dog leg, route now proposed” (at ).
- The court focussed on the role of the director, distinguishing it from the role of a third party adviser. “First, […] the contract with the adviser is trust property because the engagement is made in the course of administering the trust and for the purposes of the trust. In that regard a contract for services is akin to an investment made by the trustees under their administrative power of investment: the benefit of the contract, like an investment, is property of the trust. Second, as already discussed, it makes no sense to say that the trustee company appoints the directors, whether in the administration of the trusts or, indeed, were it relevant, as part of the discharge of its duties to protect the trust property. It may be that in performing their duties the directors of the trustee company are engaged in acts of administration of the trust, but it does not follow, in my judgment, that the directors have been appointed by the trustees, whether under their administrative powers or pursuant to their duties” (at ). In those circumstances there was no room for a dog-leg claim.
A dog returning to its… dog-leg claim
- In spite of the violence done to dog-leg claim in Alhamrani and Gregson, it is, we consider, still possible for successful dog-leg claims to be made.
- In summary, the claimant must be able to show that there are special circumstances as a result of which the duties owed to the trustee company by the errant director give rise to a cause of action which vest in the trust as trust property. Some assistance is given in the cases above on how such a case may be identified.
- First, the trustee company cannot be a Professional TrustCo. It must be a company which administers one, or a small number of interlinked, trusts. That was the case in HR v JAPT, but not in Alhamrani and Gregson. The reality is that dog-leg claims only seem viable against PTCs.
- Second, the director must have undertaken some special relationship with the trust or trusts in question that goes beyond mere sole administration. Perhaps he or she must hold the trust property himself or otherwise act in way that goes beyond directorship and in effect undertakes custodial or other fiduciary duties directly to the beneficiaries. Or perhaps he or she must have a personal interest in the subject matter of the transaction complained of in the claim.
- Third, there must be no other recourse. The PTC in question must have no assets or insurance against which a judgment can be enforced. There must be strong reason to believe that placing the PTC into liquidation and having the liquidator enforce the director’s duties by way of claim on behalf of the company is not viable, probably because there are no external creditors to finance a liquidation or be prejudiced by the claim. Indeed, it is perhaps in the case of insolvent or effectively shell PTCs that the dog-leg has most room to kick.
- Fourth, the claim must neither be based on dishonesty such that accessory liability is engaged, because then the dog-leg route is unnecessary, nor be barred by exoneration or exculpation clauses.
- Such circumstances are likely to rare. But they are not inconceivable. Directors of PTCs with no assets in remote jurisdictions, who directly administer trust assets or who otherwise step beyond their role as mere director in single trust or single family structures may be exposed to dog-leg claims.
The tail wagging the dog?
- There may also be faint glimmerings that the courts would be more willing to permit dog-leg claims in a wider range of cases in the future, although we would not wish to over-state that possibility.
- An interesting example is In the matter of the X Trusts  SC (Bda) 56 Civ. That was an application by one set of beneficiaries in a major trusts structure to remove not the two PTCs which administered the (many) family trusts, but the directors. The application failed on its facts, but Kawaley CJ held at  to  that:
“The breadth and flexibility of the Court’s supervisory jurisdiction over trusts is confirmed rather than undermined by the concession made in the instant case. The directors of corporate Trustees, whom the Court has no power to formally remove, have expressly conceded that the Court may validly decide whether or not it is desirable for them to resign, if a case for removing the Trustees is made out.
It would be surprising if the Court could not validly make similar findings in circumstances where the directors did not expressly agree to any directions the Court might give as to the desirability of a resignation. It is also difficult to conceive that the Court could not, in circumstances where (a) a corporate trustee’s directors served multiple clients, and (b) a prima facie case for removal of the corporate trustee was made out, direct (or signify) that a director’s continued deployment in the administration of a particular trust would, be inconsistent with the due administration of the relevant trust. There is no need to resolve these questions in the present case but in general terms the oral submissions of Mr Brownbill QC on the flexibility of this Court’s supervisory jurisdiction over trusts were fundamentally sound.”
- The context of the remarks was obviously the directors’ concession that they would resign if so directed. But the court went wider and held that the scope of the court’s supervisory jurisdiction was sufficiently wide to permit its intervention in the internal management of trustee companies. Strikingly, that went wider even than any court had envisaged in the dog-leg claims, the judge’s example apparently focussing on companies which administer multiple trusts, thus including Professional TrustCos. There is no obvious reason why the same reasoning is not applicable to claims against directors, albeit that may militate rather against the soundness of the decision in In the matter of the X Trusts rather than point to an expansion of the dog-leg jurisdiction.
- Another possibility comes from a line of cases focusing on so-called double derivative claims where the beneficiary of a trust brings a claim on behalf of the trustee (the first derivative) as shareholder of a company held in the trust (the second derivative). Such an example is Popely v Popely  EWHC 276 (Ch) where the court held at ff. that such an action can continue if both limbs of the derivative test are met, i.e., the test for a trust derivative claim and the test for a corporate derivative claim. It is striking that the trust derivative test is that there must be “special circumstances which embrace a failure, excusable or inexcusable, by the trustees in the performance of the duty owed by the trustees to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate”: Roberts v Gill  1 AC 240 at . It may be said that those “special circumstances” could point the way for a broader set of “special circumstances” applicable to dog-leg claims.
- That is certainly consistent with Hambin v World First Ltd  EWHC 2383 (Comm) at , another double derivative case, where HHJ Pelling QC held that “there is no dispute that the second defendant is in insolvent liquidation. There is no dispute that it was in effect hijacked by fraudulent individuals and used as the means by which a fraud was carried into effect. However, “special circumstances” are not a closed category of particular circumstances but is a flexible concept available for use wherever the circumstances truly justify, and in my judgment to at least the level of realistic arguability the claimants satisfy the requirement for special circumstances in the circumstances of this case.” That suggests that “special circumstances” may be wider than first appears, and that the insolvency of the trustee may well be relevant.
- Some further insight has been provided by the Court of Appeal in McGaughey v Universities Superannuation Scheme Limited  EWCA Civ 873, very recently. That was an attempted double derivative claim against the directors of the corporate trustee of a pension trust which is a sole trust PTC limited by guarantee with its directors being its members. However, the claimants expressly disavowed a dog-leg claim on the basis that there was no cause of action belonging to the trust (at ). The Court of Appeal held that the particular requirements of a corporate derivative claim were not met; but Asplin LJ did leave open the possibility of a dog-leg claim in somewhat less tightly restricted terms than we have seen above. At  she summarised the position as follows: “Dog-leg claims are dependent, therefore, upon whether the chose in action in relation to the breaches of duty by the directors is held by the trustee company on trust for the beneficiaries. Whether such a claim is arguable will turn upon the facts of the case. But as Lewin explains at 43-067, where the trustee company is a one trust, no asset company, created solely for the purpose of administering the trust in question, it is not unarguable that the company’s claims against the directors may be held on trust, opening up the possibility of a dog-leg claim.” At  she said that “[e]ither the proceeds of any action is held qua company, in which case, it is not clear that they have any interest in it whatever and certainly not enough to give them standing to continue the action, or the proceeds would, ultimately, be held on behalf of the Scheme and therefore, a beneficial derivative action or a dog-leg claim would be the correct course to take.”
- Asplin LJ’s comments suggest a less restrictive approach than appears from the review of the earlier authorities above. However, those observations are obiter given the way the claim was put (as a common law company derivative claim); and care should be taken in reading the Court of Appeal as encouraging a dog-claim even on the facts before it, which involved a single trust PTC without any assets of its own. As the judgment shows, the would-be claimants faced a number of serious problems in relation to breach of duty and loss and the court did not have to consider how those might have affected a dog-leg claim.
- These recent cases therefore suggest some scope for extension of the dog-leg claim, but probably only in exceptional circumstances where such a claim is the only way to avoid obvious injustice.
- In practice, the obstacles to a would-be claimant remain. As we have said, where a beneficiary has a direct claim based on dishonesty by the director, the dog-leg route is superfluous. Where there is no dishonesty, claims are likely to fail in the face of exoneration clauses and the long-established principles of company law mentioned above.
- Some glimmers of light may be shining through the cracks but the door to claims is certainly not wide open, and so, with the greatest possible apology to our readers who have reached this far, we do not yet think there is any need to ask, “who let the dogs out?”.
 We say nothing about the principles behind those decisions here, the effect of which would likely require statutory intervention to undermine or diminish.