Manton v Manton [2021] EWHC 125 (Ch)

This case concerned a claim for the removal of a trustee of a family trust on the basis that, by setting up a company in direct competition with a company owned by the trust, he had placed himself in a position of conflict which endangered the trust property. It provides a valuable restatement of the stringency of the no-conflict rule and how it operates in relation to the removal of a trustee.

Factual background

A trust was set up in 1999 by Lillian Manton. The original trustees were her son Warren, the first claimant, and his wife, Madge, the second claimant. The trust was set up for the benefit of Warren and Madge’s children: Paul, the defendant; Tim, the third claimant; and Joanne, the fourth claimant.

A reorganisation in 2016 meant that the trust property primarily comprised the entire share capital of a holding company which owned two subsidiary companies, Manton Interlink and IDD. Paul, Tim and Joanne were also made trustees. As a result, all five parties were simultaneously trustees of the Trust and directors of each of the companies in which the Trust held an interest.

The principal operating company was IDD, a business designing and constructing exhibition stands for events. Paul and Tim acted as joint managing directors, each dealing directly with a portfolio of clients, and Joanne and Paul’s wife Jane held administrative roles. However, shortly after the reorganisation, Paul had a serious disagreement with Tim and Joanne over the running of the business. Following the dispute, Paul set up a company with Jane, IDE, which had a similar business to IDD, and left IDD less than two weeks later. IDE began trading immediately and a number of Paul’s clients at IDE followed him to IDD.

The claimants alleged that IDE was in direct competition with IDD and had solicited and taken a significant number of IDD’s former clients. Paul’s involvement with IDE created a conflict between his fiduciary duties to the beneficiaries of the Trust on one hand and his self-interest and/or duty to IDE on the other. The claimants accordingly brought a claim for his removal, arguing that the conflict of interest was harmful to the operation of the Trust because it restrained the other trustees as to what they can discuss with Paul. The Trust was in particular unable to discuss the merits of taking action against Paul, Jane or IDE while Paul was a trustee, and would be unable to take action if it were merited because Paul as a trustee can and would vote against unanimity. They also argued that Paul had not dealt and would not deal with any of the affairs of the Trust since the dispute arose and that there was an irreconcilable breakdown of relationships and implacable hostility between the Trustees.

Paul resisted his removal, denying solicitation of IDD’s clients and that IDE’s business has caused any loss to IDD.

The case was heard in the High Court in Birmingham before HHJ David Cooke between 7 and 11 December 2020.

The legal principles

The application for removal relied on the court’s inherent jurisdiction to remove a trustee rather than the statutory power in s 41 Trustee Act 1925, because the claimants did not seek to have anyone else appointed in Paul’s place.

The overriding consideration was the proper administration of the trust and the welfare of the beneficiaries following the definitive case of Letterstedt v Broers (1884) 9 App Cas 371. The judge referred in detail to Lewison J’s analysis of the relevant passage in that case in Thomas & Agnes Carvel Foundation v Carvel [2007] EWHC 1314.  Applying this, he considered that it is not necessary to show actual misconduct by a trustee, “though of course many cases do rely on such misconduct and if it is shown and is material the court is very likely to exercise its power. Nor is it always sufficient to justify removal that there is a friction or hostility between one trustee and the others, though that may be relevant, particularly if it arises from the way the trust has been administered” [13].

The misconduct alleged in this case was a breach of the no-conflict rule, by which “a trustee must not place himself in a position where his personal interest, or interest in another fiduciary capacity, conflicts or possibly may conflict with his fiduciary duty to protect those whom he is bound by that duty to protect” (Lewin on Trusts 45-033, cited at [16]). In relation to the removal claim, it was not necessary to show that financial loss had actually occurred due to the conflict of interest, but a breach of duty which put the trust at risk of loss would be highly relevant to whether the trust had been properly administered and the interests of the beneficiaries prioritised.

The judge also referred to the recent case of Schumacher v Clarke [2019] EWHC 1031 to emphasise that the court placed a focus on the best interests of the beneficiaries as a whole class as distinct from the beneficiaries as individuals. Further to this, the judge insinuated that the parties, in pursuing a five-day trial of disputed issues of fact, had not heeded Chief Master Marsh’s observation in Long v Rodman [2019] EWHC 753 (Ch) at para. 20 that such a trial would be rarely needed in a removal application because of the focus on the beneficiaries as a whole and the lack of need to prove actual misconduct.

The decision

Giving judgment on 29 January 2021, the judge considered there was no doubt that a conflict of interest had occurred and that this conflict had plainly endangered the trust property. Even though it was not necessary to show that financial loss had occurred, in this case there was a “plain and obvious risk” [54] that such a loss would, and indeed did, eventuate, arising from the risk of diversion to IDE of a high proportion of IDD’s customers.

Paul argued that he could continue to be a trustee and director of IDE because there was little business that was required to be done at the level of the Trust, and he could continue to participate in discussions and decisions without requiring or seeking confidential information about the operation of IDD.  The judge rejected this argument, considering that it did not reflect the reality of the close relationships between the Trust and the corporate entities. Tim, Joanne and Warren gave evidence that the affairs were discussed together, and while it would be theoretically possible to separate out such discussions it would be a significant inconvenience and substantial change to operations, made necessary only by Paul’s decision to establish a competing business.

As regards to the hostility, the judge found that there was a great deal of it and it was implacable. It was not for the court to decide which side of the family was in the right and the judge could not at Paul’s counsel’s behest “discount the evidence of the hostility as a reason why Paul should be removed on the basis that he believes he is right and those hostile to him are wrong” [67].  In the judge’s view, this hostility carried real risk of affecting the administration of the trust.

For all these reasons, the judge removed Paul as trustee of the trust.

Practical points

This judgment provides a useful restatement of how strict the no-conflict rule is and how it operates in relation to the removal of a trustee, particularly in relation to the relevance of financial loss or the risk of such loss. It also gives helpful guidance as to how to approach cases that may arise in the family context where the trustees are not only beneficiaries but also the directors of a family company owned by the trust. Lastly, it serves as a salient reminder that an application to remove a trustee need not require a trial of disputed issues of fact.

(Author: Emma Carslaw, 5 Stone Buildings)