First published on ePrivate Client, July 2020
These unprecedented times of COVID-19 are challenging for all of us and trustees are no exception. Trustees can face a wide range of issues from investment values to beneficiaries dying. This article will consider trustees duties and how trustees might manage those duties during COVID-19.
Trustees' duties do not change because of the impact of COVID-19. These duties will generally require trustees to act in good faith and in the best interests of beneficiaries. Such duties are far-reaching and are principally judged objectively and their applicability will change depending on circumstances. In the new world of COVID-19, circumstances can change daily and trustees need to ensure they are aware of any changing circumstances applicable to their administration and take appropriate and timely action or risk being in breach of their duties. Should trust property suffer loss in value because of a breach of trust, trustees can find they are personally liable and obligated to reconstitute the trust property to the value of the losses.
Additionally, the trust documents, and commercial agreements entered into by trustees, may also put trustees under further duties or obligations that need to be adhered to. Trustees' duties and obligations will continue to apply regardless of the surrounding circumstances of COVID-19. Trustees cannot contract out of their duties but they may seek to re-negotiate obligations under commercial agreements, if other parties are willing.
Trustees should undertake an analysis of the property held in trust and the likely impact of COVID-19. This may involve:
(1) reviewing investment portfolios (whether under advisory or management), reconsider any investment strategies and, if necessary, take appropriate action to replace investment advisers or managers;
(2) reviewing real estate investments, any associated borrowing, rental incomes. If tenants are not currently capable of making full rental payments, then trustees may need to consider making a voluntary arrangement with tenants or potentially risk an empty property which will not produce income for the foreseeable future. However, this may depend on the trustees' borrowing situation and the trustees may need to approach their lenders seeking to mirror any voluntary arrangements with tenants;
(3) considering liquidity for loans made or due whether with financial institutions or beneficiaries;
(4) ensuring possession of up-to-date financial information for companies held in trust to consider any shareholding position; trustees are often the legal owners of family trading businesses or other assets.
In respect of liquidity, trustees should be mindful of the risk of a trust becoming insolvent on a cash-flow test and how their duties and obligations might change. Insolvency shifts the trustees' duties to the best interests of the creditors and the trustees would be wise to consider applying to their local courts for directions, or appointing professional insolvency practitioners to take over the administration, to wind-up the trust. At the very least this will protect their position from any conflict of interest.
Where trustees are shareholders, they should consider any applicable shareholder duties and responsibilities upon them in order to act in the best interests of beneficiaries. Typically, this means taking into consideration what a reasonably prudent person would do as a shareholder in comparable circumstances. However, trustees may have the benefit of "Anti-Bartlett" clauses contained in the trust documents which may assist to protect them from such shareholder duties. In this regard, the 2019 decision of the Hong Kong Court of Final Court in Zhang vs DBS Bank (Hong Kong) Ltd and others will be of particular interest for trustees.
Finally, trustees need to consider third parties, such as protectors or settlors, who have either positive or negative powers vested in them by the trust documents; particularly in respect of investment control. In the event of the death or incapacity of third parties, trustees need to ensure either:
(1) that the mechanics under trust documents work effectively to replace these persons to ensure administration is not hindered; or (2) they know if such vested powers revert back to the trustees as a default and which will add to existing duties.
"May you live in interesting times" is often used as an ironic expression to mean that life is better in uninteresting times when there are no serious problems to overcome. We are certainty living in interesting times and trustees need to be constantly mindful of their duties and obligations and be proactive in taking steps as required to ensure they adhere to their duties and obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.