London Capital & Finance Plc v Global Security Trustees Ltd

The court’s inherent jurisdiction to remove a trustee is exceptional only in the sense that it is infrequently used. It does not impose an additional threshold requiring exceptional circumstances or a particularly strong case. The governing consideration is the welfare and best interests of the beneficiaries, assessed in all the circumstances. Actual conflicts of interest, reasonably held perceptions of conflict, inadequate suitability, loss of beneficiary confidence and lack of useful functions may justify removal. The court should distinguish removal from the separate question of whether a replacement trustee is required and, if so, who should be appointed.

London Capital & Finance Plc, acting through its Administrators, sought the removal of Global Security Trustees Ltd as security trustee under a debenture and security trust deed securing mini-bonds issued to investors. The application arose after LCF entered administration and substantial losses and conflicts of interest were identified. LCF sought the appointment of the Administrators or another trustee in GST’s place.

The central issues were the applicable test under the court’s inherent jurisdiction, whether GST should be removed in light of conflicts, beneficiary wishes and the limited utility of its continuing role, and whether the court should immediately appoint a replacement trustee.

1. Applicable jurisdiction. The court had jurisdiction under its inherent jurisdiction to remove GST and appoint another trustee. Although section 41 of the Trustee Act 1925 would more commonly be used, the inherent jurisdiction did not attract an additional threshold of exceptionality or require a strong case. The governing test, derived from Letterstedt v Broers (1884) 9 App Cas 371, was the welfare and best interests of the beneficiaries, considered in the circumstances as a whole.
2. Meaning of exceptionality. Davidson v Seelig [2016] EWHC 549 (Ch) did not establish a separate threshold. Its reference to exceptional circumstances was an application of the ordinary beneficiary-welfare test. Falling out between beneficiaries and a trustee would ordinarily be insufficient alone, but misconduct, conflict or other circumstances affecting beneficiary welfare could justify removal.
3. Application to GST. GST’s close connections with LCF, its directors, advisers and borrowers created actual conflicts and a reasonably held perception of conflict. Its directors and shareholders had failed to appreciate the need for scrupulous avoidance of conflicts. GST’s principal contractual functions had largely been overtaken by the administration, and its proposed residual role was insufficiently connected to the trust documents and risked duplicating the Administrators’ work. The bondholders’ wishes therefore carried substantial weight. The fiduciary requirement of single-minded loyalty and avoidance of conflicts, discussed in Bristol and West Building Society v Mothew [1998] 1 Ch 1, reinforced the conclusion.
4. Replacement trustee. Removal and replacement were distinct questions. The court was not yet able to determine whether a residual security-trustee function existed or whether the Administrators should perform it. GST was removed with immediate effect, subject to hearing submissions about any interregnum. Further evidence was ordered concerning four possible replacement trustees, including likely costs, after which a new trustee would be appointed. The new trustee could seek directions if uncertain about its role or utility.