It is claimed that the corporate trustees’ rights against its directors are an asset of the trust, as they are held by the company for the benefit of the trust rather than by the company for its own benefit. In this way, it has been proposed that as well as the company itself being able to bring a claim against a director for breach of duty, beneficiaries can bring derivative claims to enforce performance of the directors’ duties. Beneficiaries can therefore effectively sue directors of the trustee company for breach of trust – a so called dog-leg claim.

Directors' duties and the dog-leg claim

As a starting point, it should be remembered that directors are agents of a company, and act for and on behalf of the company. They are the natural persons who as agents make and then carry out decisions of a company. Therefore any breach by a director of a company will usually be regarded as a breach by the company itself.

In England and Wales, company directors have both common law and statutory duties to discharge their duties with reasonable care. Directors also owe a fiduciary duty to the company. In the early case of Bath v Standard Land Co. Limited 2 it was held that:

“directors stand in a fiduciary relation to the company, but not to a stranger with whom the company is dealing”.

This case went on to make clear that the fiduciary duties a director owes a company do not extend to duties owed to a beneficiary. The judgment stated that:

“It is of course true that a company acts through its directors. But that does not involve the proposition that if a breach of trust is committed by a company acting through its board a beneficiary can maintain any action against the directors in respect of such breach of trust.”

The recent development of dog-leg claims has thrown this longstanding principle into doubt and has raised serious concerns amongst the corporate trustee community.

Relevant case law

Prior to the Gregson judgment there had been a number of relatively recent cases that considered the possible existence or otherwise of “dog-leg” claims. In the case of Young v Murphy3 (heard in the Supreme Court of Victoria, Australia), the Court rejected the proposition that the director’s duty to the company was an asset of the trust, considering instead that the benefit was for the company’s creditors in liquidation. In his judgment, Mr Justice Phillips made clear that:

“… insofar as those duties [of the directors to the company] were founded in the common law, there might be a right of damages and, if they be fiduciary duties, there may be a right to equitable compensation. Either way, it is the company in which the right of action is vested.”

The case distinguished the benefit of contracts entered into by the trustee of a trust, with, for example, a solicitor or other professional, whose services were engaged specifically for the purpose of the trust from the outset by the trustees in their capacity as trustees (and which therefore involved trust assets), from the benefit of any claim against a director of a corporate trustee which was not an asset of the trust.

More recently, the High Court of England and Wales considered the possibility of dog-leg claims in the case of HR v JAPT 4. Mr Justice Lindsay found that there was nothing to disturb the principle that a director of a trust company stands only as a fiduciary to the company. He did however find that in the particular circumstances of a one-trust company (as was relevant in that particular case), the dog-leg claim was not unarguable. The circumstances of the case included that the company administered a single trust and had no assets of its own. The Court refused to grant an application to strike out a dog-leg claim, and ever since there has been concern that beneficiaries may be able to make direct claims against the directors of a trust company, even in the absence of dishonesty.

The Royal Court of Jersey considered dog-leg claims in the case of Alhamrani & Others v Alhamrani & Others5. In this case two beneficiaries brought claims against the two corporate trustees for breach of trust, and subsequently tried to bring an amendment to bring dog-leg claims against a director of each corporate trustee. Commissioner Page refused to allow the amendment. He held that the idea that the right to performance of the directors’ statutory duties to the company could be trust property had a degree of “artificiality and awkwardness” about it, and would lead to undesirable uncertainties in the inter-relationship between trust law and company law. He thought it was also relevant that the directors’ responsibilities were not confined to the trusts in question, which added weight to the argument that the position for large corporations with many trusts under administration was more protected. However, the position for smaller one-trust companies administering a single trust might be less clear.

Gregson v HAE Trustees Limited

In this case, a claim was made against the directors of a corporate trustee HAE Trustees Limited (HAE) by the beneficiary of the family settlement of which HAE was trustee. HAE was the trustee of several family settlements, including a discretionary settlement (the Settlement) which held shares in a family company (the Company) originally owned by the settlor. The Company went into administration in 2004 and the shares in the Company became worthless. The claimant (a beneficiary of the Settlement) alleged that the directors of HAE were in breach of their duty of care to HAE and that such claims were trust property of the Settlement.

The Court held that the directors’ duties were owed only to HAE and it was for HAE to determine whether or not to enforce those duties. Robert Miles QC rejected the claimant’s arguments that a legal mechanism existed for the imposition of a dog-leg claim and rejected the proposition that the directors of a trustee company were engaged by the trustees of a trust, and did not therefore believe that their duties could become trust assets. He emphasised that
“dog-leg” claims appear to cut across clearly established principles of company and employment law.

Robert Miles QC considered a number of cases in his judgment including those mentioned above and reaffirmed the principles in Bath v Standard Land Co. Limited, stating:

“The dog-leg claim, if valid, would, for all practical purposes, circumvent the clear and established principle that no direct duty is owed by the directors to the beneficiaries. The refusal of the law to accept that directors of a trustee company owe a direct duty to safeguard the assets of a trust of which it is trustee is, I consider, a powerful reason to doubt that directors may be liable to the beneficiaries of the trust by the indirect, dog-leg, route now proposed.”6
Although the judgment may have left open the possibility of dog-leg claims in limited circumstances (notably single-trust corporate trustees as Robert Miles QC specifically distinguished HR v JAPT because of the facts in that case relating to a single-trust corporate trustee), the forceful dismissal of the dog-leg claim in the present circumstances will certainly be a relief for directors of trustee corporations and of many private trustee companies. Corporate trustees often administer multi-million dollar trust funds, but often have few assets themselves. Corporate trustees, particularly private family trust companies, are often used and established in order to offer individual directors a degree of protection; any development of dog-leg claims would cut straight across this. Directors can now have more confidence that the Courts of England and Wales will not allow a dog-leg claim in all but the most exceptional circumstances.

1 [2008] ALL ER (D) 105 (May)
2 [1911] 1 Ch 618
3 [1996] 1 VR 279
4 [1997] C.L.Y 692
5 [2007] JRC 026
6 [2008] ALL ER (D) 105 (May) at para 46