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In this case, the court held that it would exercise its inherent jurisdiction to remove a trustee in circumstances where the beneficiaries were creditors facing very substantial losses following the collapse of London Capital & Finance, and it was clear to the court on the facts that there was a very grave concern that those creditors did not have confidence in the existing trustee appointed to represent their interests. The decision addresses both the court’s statutory power to remove a trustee under section 41 of the Trustee Act 1925 (TA 1925) and its inherent jurisdiction to do so.
n an insolvency scenario, the court confirmed that the best interests of the creditors were, if not paramount, a very material consideration that the court should weigh in its decision-making. The extent of creditor losses here, the questionable conduct of several parties and the existence of conflicts of interest, among other matters, all contributed to the conclusion that it was unacceptable for the existing trustee to remain in office. Written by Brett Israel, partner in the restructuring and insolvency group, Marriott Harrison LLP.
London Capital & Finance Plc v Global Security Trustees Ltd  EWHC 3339 (Ch) (10 December 2019)
It is not uncommon in financial services cases for an insolvency practitioner to come across a trust structure where a trustee has been appointed to represent the interests of beneficiaries who are likely to be creditors. This case provides some guidance to insolvency practitioners on the circumstances in which the court may be prepared to exercise its discretion to order the removal of the trustee, as well as on the appointment of a replacement.
It is clear that where the trustee in office does not inspire confidence in the beneficiaries regarding the protection of their interests, it will be appropriate for the trustee to be removed on the ground that the best interests of those beneficiaries is a fundamental consideration which will weigh heavily in the balancing of interests assessment. However, the fact that the beneficiaries had fallen out with the trustee was unlikely, of itself, to be a sufficient determinant.
This case emerges from the controversy surrounding the collapse of London Capital & Finance Plc (LCF) into administration amid great concern around the selling of so-called ‘mini-bonds’ to private investors who were left facing very substantial investment losses. The LCF situation is particularly controversial because it has served to highlight significant gaps in the regulatory regime which apply to the sale and marketing of mini-bonds which can be very illiquid investments. The Financial Conduct Authority (FCA) has recently moved to plug some of the gaps by introducing temporary intervention measures set out in section 4.14 of the Conduct of Business Sourcebook of the FCA Handbook (Conduct of Business (Speculative Illiquid Securities) Instrument 2019).
LCF sold mini-bonds to private investors with the proceeds of such bonds being used by LCF for on-lending to various borrowers (albeit to a much narrower range of borrowers than investors had been led to expect). LCF raised some £237m from more than 11,500 private investors. In the event, it appears that the aggregate of investor monies was advanced only to 12 companies, some of which were connected with the trustee.
LCF had appointed the defendant company, Global Security Trustees Limited (GST), as a trustee and created a debenture in favour of GST as security for repayment of the bonds. GST was appointed as ‘security trustee’ to hold the benefit of the rights and interests created by the debenture on trust for the bondholders.
At issue was the fact that GST was not an independent trustee as might have been expected. There were a number of close and overlapping connections between LCF and GST and related professional and other parties, including a firm of solicitors which acted for LCF, leading to conflicts of interest arising. These close connections, among other things, were such that the administrators of LCF applied to the court for the removal of GST as trustee and for its replacement either by the administrators themselves or by another trustee (or trustees) as the court might determine.
The court focused on two questions—whether GST should in the circumstances be removed as trustee and, if so, who should be appointed as replacement trustee(s).
The court considered its jurisdiction to assess the conduct of a trustee. This included regard to its powers under TA 1925, s 41. Aside from this statutory power, the court also has an inherent jurisdiction. The court confirmed that, while it was unusual for it to exercise its inherent power to remove a trustee (usually because this would be done pursuant to the power under TA 1925, s 41), there were no exceptional circumstances in doing so which the court would need to take account of, because of the usual checks and balances which applied to its consideration of whether to exercise its inherent discretion. The court emphasised that it would never remove a trustee lightly. It confirmed that ‘the welfare of the beneficiaries and what is in their best interests are infallible guides to both whether the power [to remove a trustee] needs to be exercised and, if it does, how it is to be exercised’ (at para ).
On the facts, the court was in no doubt that GST should be removed as the security trustee. It held that ‘the wishes of the bondholders weigh heavily in the balance’ (at para [61(6)]), but it was not satisfied that the creditors could have confidence in the existing regime in place tasked with the recovery of their losses, hence the need for a change to be made. The point was made, however, that the mere fact that the beneficiaries had fallen out with the trustee was unlikely to be a sufficient factor on its own. The court acknowledged that the more difficult question for it was whether it should appoint the administrators or an independent professional trustee in GST’s place. It was decided that the court needed further information in this regard and asked the administrators to submit evidence of the qualifications of certain professional trustee candidates for its consideration, in the process alluding to the likelihood that it would be preferable for an independent professional trustee to be appointed rather than the administrators themselves.
Court: High Court, Business and Property Courts
Judge: Chief Master Marsh
Date of judgment: 10 December 2019
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Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.
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