We are somewhat getting used to the new way of life, which the global pandemic has brought about so unexpectedly, yet so universally across all aspects of our personal and professional lives, regardless of our geographical location. We got into new habits and routines. Finally, yet slowly we start coming up for air. As we start to re-emerge though, we are conscious that what we are about to experience is a somewhat changed picture.
What risks does this changed reality carry for trustees?
The FTSE, Dow Jones Industrial Average and the Nikkei have all seen huge falls since the outbreak of COVID-19. Both FTSE and Dow Jones experienced the biggest quarterly drops since 1987. The number of people filing for unemployment in many countries has hit record highs. Oil prices have fallen to the lowest level seen in 18 years. The International Monetary Fund is estimating the global economy to shirk by 3%, the worst decline since the Great Depression of the 1930s. “Crisis like no other”, many say, and no crisis has yet gone by without leaving its impact on the private wealth locked up in trusts.
During economically unpredictable times, trustees who are in charge of assets, which may fall sharply in value, are likely to be anxious about making decisions forwhich they may come under heavy criticism. What should trustees therefore do? Should they simply “hibernate” and wait for better times? Certainly no! Crisis always leads to greater scrutiny by beneficiaries of the trustees’ dispositive and investment powers. Nevertheless, criticism of trustees’ actions during investment-wise volatile times cannot be spared only in relation to those trustees, who sit back in the hope that they will be able to hide behind generous exoneration clauses. What should therefore trustees be really doing?
- Re-consider and understand the scope of their duties
A good understanding of the trustees’ investments and management duties, both as set out in section 3 of the Trustee Act 2000, but also in the trust deed itself is a key. Trustees must also bear in mind any additional obligations that may arise out of any additional arrangements that they may be bound by.
- Review investment strategy
Trustees are not expected to have prophetic wisdom about how investments will perform. Neither are they expected to act as guarantors for investments they hold. Nevertheless, they may well be expected to review the investments’ performance or even redesign the investment strategy. What was a beneficial investment strategy so far, may no longer be appropriate. A prudent trustee will always diversify to spread risk.
- Form your own views
No trustee is expected to be an endless well of investment specialism. As any prudent man of business a trustee is expected to recognise when specialist investment advice would be of benefit. Nevertheless, seeking specialist advice does not absolve a trustee of all responsibility. Trustees must always form their own judgment of the advice received and when necessary, seek additional information to allow them to form such a judgment.
- Not over-rely on anti-Bartlett provisions or exoneration clauses
Trustees have a duty to supervise and intervene in the management of companies, in which they hold a controlling interest. As confirmed by Brightman J in Bartlett v Barclays Bank Trust Company ( 1 All ER 139), trustees who are controlling shareholders, should seek regular and adequately detailed information concerning the company’s affairs that will allow them to ensure that the underlying company’s affairs are being conducted properly. Trustees can and should receive periodic reports from the board of directors, together with copies of board meeting agendas, minutes and the quarterly management accounts. This will allow trustees to detect the signs of financial problems the company may be experiencing, and allow them to decide if any steps could or should be taken to better protect the interest of the trust’s beneficiaries.
Use of so called anti-Bartlett clauses, which developed since the judgment mentioned above, is very common. Anti-Bartlett clause seeks to remove the trustees’ duty to intervene in the management of the company that holds the trusts’ funds, except where trustees are on notice of serious mis-management or wrongdoing by the board of directors. Particularly since the judgment in the case of Zhang Hong Li and others v DBS Bank (Hong Kong) Limited and others  HKCFA 45, trustees may feel reassured about the effectiveness of the protection against liability offered to them by anti-Bartlett clauses. Trustees should not however over-rely on the power of such clauses. The facts of Zhang case are very exceptional, hence the applicability of the decision to different or less extreme scenarios is very likely to be tested by trust litigators.
Rather than blindly rely on the effectiveness of anti-Bartlett clauses, trustees are best advised to consider the wording of the trust deed very carefully and assess whether construction of any exoneration clause still leaves them with any residual responsibility for supervision and intervention in the management of the company in times of stress. Prudent trustee ought to take a pro-active approach to considering their investment duties. Trustee must make sure that the trusts’ assets are protected and this means that they should monitor how those assets, including corporate structures, are performing in the economic turmoil.
- Communicate, communicate, communicate….
Even with regular reviews, best investment advice and reasonable risk spreading, trustees may be unable to prevent the reduction in the value of the trust capital or income. We live in unpredictable and risky times. However, without sounding patronising, maybe this is what the beneficiaries therefore need to hear. Trustees, expecting a fall in the value of assets and increase in the number of demands for distributions beneficiaries are likely to make, find themselves slightly caught between the rock and a hard place in the current climate. However, especially at times like this, good communication is a key. Potentially more frequent or more widely shared updates about investments, their performance, conclusions drawn out of the analysis and decisions made may help with managing the beneficiaries’ expectations.
- If in doubt trustees may and should seek direction of the court
Despite the need to adjust working practices, courts are still functioning and in fact, given the circumstances, do so impressively efficiently.
This article first appeared in ePrivate Client https://www.paminsight.com/epc/article/trusts-during-pandemic-are-trustees-running-greater-risk