Barclays Wealth Trustees (Jersey) Ltd (in its capacity as trustee of the R2R Bulgaria Property Fund, the R2R Croatia Property Fund and the R2R Montenegro Property Fund and their respective sub-funds); Barclays Wealth Fund Managers (Jersey) Ltd (in its capacity as trustee of the R2R Bulgaria Property Fund, the R2R Croatia Property Fund and the R2R Montenegro Property Fund and their respective sub-funds) v Equity Trust (Jersey) Ltd; Equity Trust Services Ltd
| Jurisdiction | Jersey |
| Court | Royal Court |
| Judge | Mark Herbert |
| Judgment Date | 02 May 2014 |
| Neutral Citation | [2014] JRC 102D |
| Date | 02 May 2014 |
[2014] JRC 102D
ROYAL COURT
(Samedi)
Mark Herbert, Q.C., Commissioner, sitting alone.
Advocate J. Harvey-Hills for the Plaintiffs.
Advocate M. L. A. Pallot for the Defendants.
Collective Investment Funds (Jersey) Law 1988.
Trusts (Jersey) Law 1984.
Royal Court Rules 2004.
Lapidus v Le Blancq and Voisin & Co [2013] JRC 181A .
Underhill & Hayton Law of Trusts and Trustees (18th edition).
Kam Fan Sin's The Legal Nature of the Unit Trust (Clarendon Press 1997 re-printed 2007).
Thomas & Hudson's The Law of Trusts (2nd edition).
Financial Services and Markets Act 2000.
Bristol & West Building Society v Mothew [1998] Ch 1 .
BA v Verite Trust Company (In re E, L, O and R Trusts) [2008] JRC 150 .
Vestey's Executors v IRC [1941] 1 All ER 1108 .
In re Forest of Dean Coal Mining Company (1878) 10 Ch D 450 .
Young v Murphy [1996] 1 VR 279 .
Lewin on Trusts (18th edition).
Re Brogden (1888) 38 Ch D 546 .
Trust — application by two defendant companies to strike out parts of two plaintiffs companies claims.
This judgment deals with an application by the two defendant companies in the action to strike out important parts of the two plaintiff companies' claims. The application raises important questions about the nature of unit trusts, the legal status of managers and trustees of unit trusts, and the juridical basis of claims against them by a successor trustee and successor manager. There is some academic and professional literature exploring these questions, not all of it unanimous in its conclusions, but little judicial authority.
In financial terms the claim is substantial, and both sides appeared before me by experienced advocates, namely Advocate Marcus Pallot of Carey Olsen for the defendant companies and Advocate Justin Harvey-Hills of Mourant Ozannes for the plaintiff companies.
The claim relates to three unit trusts established in July 2005 by the defendant companies Equity Trust (Jersey) Limited and Equity Trust Services Limited as trustee and manager respectively. In the pleadings these names are abbreviated to ETJL and ETSL, and I shall follow that practice. The purpose of the unit trusts was to make investments, through intermediary companies and other investment vehicles, in property of various kinds in Bulgaria, Croatia and Montenegro.
In August 2007 the Jersey Financial Services Commission started regulatory proceedings in relation to these unit trusts under the Collective Investment Funds (Jersey) Law 1988 seeking the removal of ETJL and ETSL and the winding up of the funds. In December 2007 ETJL and ETSL were, by consent, replaced by the plaintiff companies, now renamed Barclays Wealth Trustees (Jersey) Limited and Barclays Wealth Fund Managers (Jersey) Limited as trustee and manager respectively. In the pleadings these are called BWT and BWFM.
In December 2010 BWT and BWFM issued the Order of Justice against ETJL and ETSL, claiming that the latter are liable to make compensation to the unit trusts in respect of what are alleged to be breaches of duty committed in the course of their trusteeship and management of the three unit trusts. These are expressed in terms of alleged breaches of trust, breaches of fiduciary duty and breaches of contract. They depend partly on the terms of the trust instruments and partly on statute, principally the Trusts (Jersey) Law 1984 as amended.
There are also three additional claims that arise from information contained in one or more reports made in 2007 by the accountants BDO and a later report by Grant Thornton in 2008 pursuant to the investigation by the Jersey Financial Services Commission. The first of these relates to improper time charges made by ETJL or ETSL from the funds of each of the three unit trusts, over and above what was provided for in the governing documents. This claim amounts to a little under €250,000. The second such claim is for improperly apportioned costs, where the claim is for about €6 million. The third is for improper payments made to third parties, amounting to about €9 million. Some repayments appear to have been made in response to these latter claims, but significant sums are still said to be owing. The defendants have not applied to strike out these additional three claims, but that is not an admission that the claims are valid.
Looking first at the trust instruments, there is one for each of the three trusts, namely Bulgaria, Croatia and Montenegro. For present purposes the three trust instruments are in the same terms. Each is described as an instrument made between ETSL as manager and ETJL as trustee. ETSL is essentially the promoter of each trust, though unlike ETJL it is not amongst the ‘co-promoters’ named in the prospectuses for the individual funds, and most of the obligations are made obligations of ETSL. For its part ETJL has a custodianship function.
Clause 36 provides that the manager shall manage and administer the trust and its fund and shall exercise all powers, duties and discretions except those conferred on the trustee. Clause 36.2 requires the trustee to perform all acts necessary to enable the manager to exercise its powers of management and other powers. The full text of clause 36 is given below.
Clause 37 imposes basic obligations on ETSL, namely to hold the permit for it to be a functionary of the trust, to devote time and attention to its duties, and to comply with the terms of the trust instrument itself, the prospectus to be issued to unitholders, and the fund rules. Clause 38 then spells out, in 20 sub-paragraphs, the management responsibilities of the manager. These include negotiating borrowings, reporting to unitholders, keeping accounts and book-keeping records, dealing with auditors, dealing with requests for redemption of units, the preparation of prospectuses, the determination of questions relating to the allotment of units, and finally maintaining the administrative services reasonably required for the due performance of its duties.
Clause 39 deals specifically with investment management, imposing on the manager substantive duties in relation to the acquisition, review, and sale of investments. Clause 39.1.4 provides that, in carrying out its duties as investment manager, the manager must observe and have regard to the primary purpose of the trust's investment policy as described in the prospectus and fund rules for each class of unit, any restrictions for the time being contained in the trust instrument, the prospectus and the fund rules for each class of unit, the entitlement of unitholders to require redemption of their units and any other matter to which a prudent investment manager to an investment portfolio should reasonably pay regard in the proper discharge of his duties. The one thing which these clauses do not impose on the manager is the actual holding of trust investments.
As for the trustee, clause 44 imposes basic obligations similar to those in clause 37 for the manager, namely to hold the permit which it requires in order to act as trustee, to devote time and attention to its duties as is necessary for the efficient conduct of them, and to comply with the terms of the trust instrument, the prospectus and the fund rules. Clause 45 then spells out the trustee's responsibilities to take custody and control of investments, and to deal with them in accordance with what are defined as the ‘proper instructions’ of the manager, to make payments in accordance with directions given by the manager, to hold title documents of investments, to open and maintain bank accounts and to keep appropriate records.
I also need to draw specific attention to three particular clauses defining the duties of the trustee and manager. These could be regarded as exoneration clauses, but in strictness the effect of each of these clauses is to limit the scope of the trustee's duties.
First, clause 26 deals with investments. These are to be held by the trustee but dealt with in accordance with the directions of the manager. Clause 26.3 defines the relation between the manager and the trustee at some length:–
“26.3 The selection, acquisition in any manner, holding, realisation in any manner and the management of Investments shall in all respects be the sole responsibility of the Manager and not of the Trustee and in relation to such matters the Trustee shall rely exclusively on the Manager and, in particular, the Trustee shall not be concerned as to whether the investment restrictions contained in the relevant Fund Rules and/or the Prospectus are complied with. Subject as aforesaid, the Trustee shall have and, in discharging its responsibilities hereunder in relation to the management of the Trust Fund, the Manager shall have (in addition to all other powers vested in them hereunder or by law) in respect of the Trust Fund the same full and unrestricted powers in all respects of –
26.3.1 purchasing or otherwise acquiring or entering into underwriting or other commitments in respect of any Investment;
26.3.2 dealing in any way whatsoever with and managing the Trust Fund and all property and Investments comprised therein; and
26.3.3 doing all acts or things in connection with the foregoing,
as either of them would have had were it absolutely and beneficially entitled thereto. No person...
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