In a judgment handed down on 30 November 2022 in Ticehurst & Ors v Harbour Fund II LP & Ors [2022] EWHC 3053 (Comm), Mr Justice Foxton ruled on various issues concerning the role and powers of funded parties as trustees under a Litigation Funding Agreement and the circumstances in which it may be appropriate to displace trustees with trust receivers. This judgment will be of particular interest to both litigation funders and funded parties where a trust structure is in contemplation, and the approach may also have broader relevance to trusts which are used in other commercial contexts, such as the role of security trustees in other types of finance transactions.
Background
The issues arose against the complex background of the Court’s findings as to the existence and priority of a range of equitable interests in various assets in SFO & Anr v LCL & 46 Ors (In re Gerald Martin Smith) [2021] EWHC 1272 (the “Trial Judgment” – the important points of which were noted here).
In brief, a Litigation Funding Agreement entered into between Harbour and the Orb Claimants (namely Orb, and Messrs Thomas & Taylor) in the underlying Orb v Ruhan litigation, contained a declaration of trust that any “Proceeds” would be held “as Trust property on bare trust absolutely” in favour of Harbour, Orb and Messrs Thomas & Taylor, with entitlements set out in a waterfall allowing for the first tranche of recoveries to be paid to Harbour as funder. At the same time, Orb and Messrs Thomas & Taylor, i.e. the funded parties, were to act as trustees.
The Trial Judgment found that certain assets and partial interests in assets were the traceable proceeds of assets which should have been held for the beneficiaries of the Harbour Trust, but which had instead been wrongfully paid away. It also found that Messrs Thomas & Taylor had improperly been implicated in this scheme and that they therefore needed to give substantial credit before they would receive any benefits under the Harbour Trust waterfall. Other assets or partial interests in assets were found to be the traceable proceeds of assets wrongfully abstracted from certain BVI companies now under the control of Joint Liquidators. In the meantime, Orb had also been declared en désastre (insolvent) in Jersey and its estate fell under the administration of the Viscount of the Royal Court of Jersey.
The Competing Applications
The initial reaction of Messrs Thomas & Taylor after the Trial Judgment was to seek the appointment of receivers over nearly the full range of assets which had been considered at trial, as well as various unpleaded claims which it was said might exist on behalf of the Harbour Trust which had not been within the scope of trial. In an abrupt change of direction some months later, and without consulting Harbour, Orb and Stewarts (who had an interest by way of solicitors’ lien) they sought to appoint Mr Ticehurst as a trustee in place of Orb. The receivership approach was then supplanted by a Part 8 claim which sought to confirm or approve Mr Ticehurst’s appointment and contended for the application of a broad suite of implied trust powers and duties, including a duty to pursue claims and get in assets. In response, Harbour, the Viscount, Stewarts and the Joint Liquidators sought various reliefs, including the appointment of new trustees, albeit with a highly circumscribed role, over certain offshore shares which are in the hands of a nominee owner and appear to be under threat from third parties, and the appointment of trust receivers over a limited class of assets which were subject to a variety of proportionate equitable interests.
The Result
Mr Justice Foxton determined that:
- the power to appoint a replacement trustee under section 36 of the Trustee Act 1925 (“TA”) had been excluded by the terms of the Litigation Funding Agreement (as permitted by section 69 TA) and so was invalid and of no effect;
- the attempt to appoint a replacement trustee was for an improper purpose on account of a range of conduct, and would have been void for that reason as well;
- it was not appropriate to validate the appointment of Mr Ticehurst under section 41 TA going forward (and the Court would otherwise have accepted his resignation);
- it was appropriate to remove Messrs Thomas & Taylor as trustees on account of misconduct if they would not (unconditionally) resign, and that new trustees, with a circumscribed role as sought by Harbour, the Viscount and Stewarts should be appointed, and their candidates were accepted;
- the commercial nature of the trust and the terms of the Litigation Funding Agreement meant that there was not a broad set of powers and duties in play, and that the role did not extend to investigating, initiating and compromising litigation for the purpose of collecting assets in;
- in light of the limited role for the trustees, the usual reticence of the Court to take the management of a traditional trust out of the hands of the trustees in favour of receivers had limited application, and it was accepted that removal of the trustees without replacing them (and leaving receivers in place) was, at least as an interim measure, an available approach which it was appropriate to take in this case.
The judgment is available here.
Richard Hoyle and Lorraine Aboagye (led by Elizabeth Jones KC of Serle Court and Daniel Saoul KC of 4 New Square) appeared on behalf of Harbour and the other Settlement Parties, instructed by Adam Zoubir and James Cockburn of Harcus Parker Limited.
