Barnes & Ors v Tomlinson & Ors

A trustee’s wide discretionary powers and exemption clauses remain subject to the irreducible obligations to act honestly and in good faith. Dishonesty is assessed against normally acceptable standards of honest conduct; a trustee’s genuine belief that the conduct was honest is not conclusive. A trustee is dishonest where conscious of committing a breach of duty or recklessly careless whether a breach is being committed. A beneficiary cannot recover loss that merely reflects loss suffered by a company which has its own cause of action. Where the trust instrument permits trustees to leave a company’s management to its directors, intervention is not required absent notice of dishonesty or misappropriation.

The claimants were beneficiaries and trustees of a family settlement holding shares in a property company. They alleged that two former trustees had acted dishonestly by accepting excessive remuneration and ex gratia payments, resigning as directors, and failing to remove directors who later committed misfeasance.

The defendants relied on the settlement’s broad investment, discretion, remuneration and management provisions, together with its exemption clause. The court considered whether the defendants had breached their irreducible duties of honesty and good faith and whether the claimants could recover losses suffered by the company.

1. The claims were dismissed. The court was satisfied that both defendants had acted honestly and in good faith and had not fallen below normally acceptable standards of honest conduct.
2. The settlement’s broad discretionary provisions did not eliminate the trustees’ irreducible obligations to act honestly and in good faith. The exemption clause therefore did not protect deliberate dishonest or wilful wrongdoing.
3. For an express trustee, dishonesty involves consciousness that the trustee is committing a breach of duty, or recklessness as to whether a breach is being committed. The objective standards of honest conduct were determined by the court. A defendant’s genuine belief that the conduct was honest was irrelevant to the applicable standard, although the evidence showed that these defendants genuinely believed their conduct was proper.
4. The remuneration paid to the defendants between 1994 and 1996, and the ex gratia payments made on their retirement, did not establish dishonesty. The court accepted the evidence concerning the defendants’ work, responsibilities, commercial understanding and reasons for accepting the payments.
5. The defendants were not obliged to intervene in the management of the company. Under clause 16, they could leave its conduct to the directors while they had no notice of dishonesty or misappropriation. The evidence did not show that they knew, or were recklessly indifferent to, the later misfeasance of the remaining directors.
6. Following Shaker v Al-Bedrawi, [2002] EWCA Civ 1452; [2003] Ch 350, a beneficiary could not claim against a trustee for loss to trust shares reflecting loss suffered by the company where the company itself had a cause of action. That principle also prevented recovery of the allegedly improper payment to Mr Burton.