Fiduciary duty and the exploits of commercial enterprise often run counter to each other, while in this instance the opportunistic actions of a solicitor produces a profitable outcome for all involved, but not without a cost to the integrity of their working relationships.

Upon the death of a successful business owner, the second appellant and respondent’s father, the widow and surviving children were bestowed relatively equal portions of a company shareholding totalling 8,000 shares of a possible 30,000 held.

This particular firm operated in two countries, and control was divisible between two families; namely that of the deceased (Phipps), and another named Harris, who were the majority shareholders.  

Having read their latest financial returns, the trustee accountant Mr. Fox suggested that the company was in poor financial health, and that if one of the beneficiaries, Tom Phipps (the second appellant), were to the be appointed as director, they could look to improving the status of the firm; thereby increasing the annuity drawn by the children from the existing 8,000 shares.

Following a meeting with the family solicitor Thomas Boardman (the first appellant), it was agreed that the two men would attend the forthcoming annual meeting in order to secure Tom’s appointment; however, their bid was unsuccessful due to board hostilities.

In the face of defeat, it was then suggested that the two appellants’ could offer to buy the remaining 30,000 shares in order to gain sufficient control and to improve the company’s financial standing.

This idea was rejected by the accountant trustee on grounds that such a move would require an application to the court; which on the face of the matter, would be dismissed as throwing good trust money after bad.

Left with no other options, the appellants arranged to self-finance the initiative; and so, set about writing to the shareholders, offering above-market purchase rates. 

After first securing 2,925 shares, the appellants went on to successfully buy all 21,986 shares at prices that proved to be significantly profitable to the beneficiaries, while explaining to the children that they were doing so not as representatives of the trust, but as private buyers acting in the best interests of the trust and those standing to profit from it.

Upon successful redistribution of the shares to the beneficiaries, the older son issued a writ, claiming that the appellants had simply been acting as constructive trustees, and therefore any profits made on the 21,986 shares were proportionately owed to the beneficiaries on grounds that the solicitor had been acting within a fiduciary capacity when making representations to the shareholders, and while accessing company information that would have otherwise been denied him when making his enquiries. 

In the first hearing, the appellants argued that they had made it clear on a number of occasions that their commercial strategies and undertakings were beyond that of the trust, and that support and acknowledgement of this had been given by the majority of the trustees and the respondent.

Relying upon the principles held in Aas v Benham, it was contended that:

“To hold that a partner “(or trustee)” can never derive any personal benefit from information which he obtains as a partner would be manifestly absurd.”

Aas v Benham

And, that the source of such information was secondary as to how it was applied; whereupon the respondent used the opinion of Russell LJ in Regal (Hastings) Ltd v Gulliver  to explain that:

“I have no hesitation in coming to the conclusion, upon the facts of this case, that these shares, when acquired by the directors, were acquired by reason, and only by reason of the fact that they were directors of Regal, and in the course of their execution of that office.”

Regal (Hastings) Ltd v Gulliver

Which underlined the argument that by an abuse of position, the appellants worked together to extract information privy only to the trustees and beneficiaries in order to secure financial gain, while partially disclosing their intentions to a percentage of the trustees, as opposed to the whole.

The first court found in favour of the respondents, and the same outcome was found in the Court of Appeal, before arriving at the House of Lords.

By a close margin, the House held that while the appellants conducted themselves with reasonable transparency, there had been oversights as to who was informed and how much they knew.

And that despite professing that they had acted outside the scope of the trust, there had also been a number of instances where veiled threats and coercive statements were used under the pretence of the trustees in order to gain important (and private) information, prior to the negotiation and procurement of the outstanding shares.

Hence, for those reasons the appeal was dismissed while the court reminded the parties that:

“[A] person in a fiduciary capacity must not make a profit out of his trust which is part of the wider rule that a trustee must not place himself in a position where his duty and his interest may conflict.”

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