Publishers Representatives Ltd v UBS (CI) Ltd

• Jurisdiction: Cayman Islands
• Judge: (Sanderson, J.)
• Judgment Date: 06 October 2000
• Date: 06 October 2000
• Court: Grand Court (Cayman Islands)

Grand Court

(Sanderson, J.)

PUBLISHERS REPRESENTATIVES LIMITED and LEE SKU KEE

and

UBS (CAYMAN ISLANDS) LIMITED

Ms. S.R.S. Proudman, Q.C. and A.J. Walters for the plaintiffs;

N.R.F.C. Timms for the defendant.

Cases cited:

(1) Armitage v. Nurse, [1998] Ch. 241; [1997] 2 All E.R. 705, considered.

(2) Downsview Nominees Ltd. v. First City Corp. Ltd., [1993] A.C. 295; [1993] 3 All E.R. 626, distinguished.

(3) Drummond-Jackson v. British Medical Assn., [1970] 1 W.L.R. 688; [1970] 1 All E.R. 1094.

(4) El Ajou v. Dollar Land Holdings PLC, [1994] 2 All E.R. 685; [1994] 1 BCLC 464.

(5) King v. Victor Parsons & Co., [1973] 1 W.L.R. 29; [1973] 1 All E.R. 206, considered.

(6) R. v. Ghosh, [1982] Q.B. 1053; [1982] 2 All E.R. 689.[1982] Q.B. 1053; [1982] 2 All E.R. 689.

(7) Royal Brunei Airlines Sdn. Bhd. v. Tan, [1995] 2 A.C. 378; [1995] 3 All E.R. 97, applied.

(8) Shaw v. Shaw, [1954] 2 Q.B. 429; [1954] 2 All E.R. 638, considered.

(9) Walker v. Stones, [2000] 4 All E.R. 412; [2000] Lloyds Rep. P.N. 864, dicta of Sir Christopher Slade applied.

(10) Wenlock v. Moloney, [1965] 1 W.L.R. 1238; [1965] 2 All E.R. 871.

Trusts-breach of trust-fraud or dishonesty of trustee-to be judged by objective standard, having regard to trustee”s knowledge-reckless disregard for beneficiary”s interests dishonest-retiring trustee”s failure to alert beneficiary to risk of misappropriation by replacement trustee may constitute breach of trust

Trusts-breach of trust-fraud or dishonesty of trustee-unnecessary in action against trust company to identify specific officer or employee guilty of dishonest conduct if identity unknown

The plaintiffs brought an action to recover damages from the defendant for fraud or dishonesty and negligence.

The defendant bank was the trustee of a pension fund for the benefit of employees of, inter alia, the first plaintiff. The bank retired as trustee and was replaced by a company owned by R, a former trust officer with the bank, who had been investigated during his employment on suspicion of fraud in relation to other trust funds held by the bank. Pension fund moneys were misappropriated by R whilst under his control, for which he was later prosecuted. The first plaintiff, as the current trustee of the fund, and the second plaintiff, representing the beneficiaries, sought to recover damages from the bank in respect of their loss, on the basis that it should have informed the first plaintiff of R”s fraud and supervised his handling of the funds. The defendant applied to strike out those parts of the statement of claim alleging fraud or dishonesty and negligence against it, as disclosing no reasonable cause of action.

It submitted that (a) its omission to inform the plaintiffs of what it knew of R”s earlier fraudulent dealings did not constitute dishonesty, since the plaintiffs had not shown that it had made a conscious decision not to act to protect the trust fund; (b) nor had the plaintiffs identified any individual officer or employee through whom the bank had acted dishonestly; (c) the plaintiffs had no prospect of success on the facts as pleaded; and (d) the bank could not be sued in negligence, since (i) the losses occurred after its failure to warn the plaintiffs of the relevant risks and after it had ceased to be a trustee, and (ii) it owed no separate common law duty to the plaintiffs other than its fiduciary duty as a trustee.

The plaintiffs submitted in reply that (a) failing to inform a beneficiary of matters affecting the security of the trust fund or turning a blind eye to the risk of misappropriation could amount to a breach of trust; (b) they

were not obliged to allege dishonesty by a particular person, since they could not be expected to know who had decided not to advise the first plaintiff of R”s fraud; (c) their claims had every prospect of success at trial, since an honest person, judged by an objective standard, would not have concealed that information, and the loss suffered by the trust fund would have been avoided; (d) it was not necessary, in order to sustain a claim in negligence, that the loss complained of should have arisen at the time of the breach of duty; and (e) their claim in negligence was independent of the claim for breach of trust, and could be relied on if they were unsuccessful in obtaining a remedy in equity.

Held, dismissing the application:

(1) The defendant”s omissions to inform the first plaintiff of the fraudulent dealings uncovered by its investigator and to take steps to supervise R”s management of the pension fund were capable of amoun-t-ing to dishonesty as pleaded by the plaintiffs. Dishonesty simply meant not acting as an honest person would do in the particular situation in question. It was to be judged having regard to what the person knew at the time, but according to an objective standard of behaviour in response to that knowledge. Although mere carelessness would not suffice, a reckless disregard of the beneficiary”s interests or rights, whether or not accompanied by consciousness of immorality, was a sign of dishonesty. An honest trustee, perceiving a risk to the trust fund, would have weighed the nature and importance of the relevant transaction and his role in it, the degree of doubt, the practicability of avoiding the transaction and the consequences for the beneficiary, and might have sought advice or advised interested parties to seek advice before becoming involved. The plaintiffs” claims of dishonesty or fraud were not frivolous or vexatious and if the facts alleged were proved they would have a reasonable chance of success (page 480, line 28 – page 482, line 32; page 485, lines 6–35; page 487, lines 7–11).

(2) Although a company, having no will or mind of its own, could act only through the persons managing and controlling it, the plaintiffs” claims would not be struck out merely because they were unable to identify the person who had taken the decision to conceal the company”s knowledge of R”s dishonesty. It was acknowledged that the findings of the bank”s internal investigation had been reported to the controlling minds of the bank (page 486, lines 18–40).

(3) The plaintiffs” claim of negligence was validly pleaded notwithstanding that the losses alleged arose after, rather than at the time of, the defendant”s breach. Nor would the claim in tort be struck out merely because the conduct alleged also formed the basis of a claim for breach of trust. The case-law revealed no authority precluding the existence of two independent causes of action arising from a trustee”s acts or omissions. In this case, if the defendant succeeded in avoiding liability in equity for

breach of trust on the ground that it had ceased to be a trustee when the losses occurred, the plaintiffs would have to rely on their common law claim for negligence. Since the negligence claim would also have a reason-able chance of success on the facts pleaded, the defendant”s application would be dismissed (page 487, lines 19–22; page 488, lines 6–21).

SANDERSON, J.: The defendants, UBS (Cayman Islands) Ltd.
30	(‘UBS’), applied to strike out the portions of the statement of claim
which alleged fraud or dishonesty and negligence.
With respect to the claim of fraud or dishonesty UBS submitted that-
(a) the facts as pleaded and particularized, even if proved, disclose no
cause of action, are frivolous and vexatious or otherwise an abuse of
35	process; and
(b) UBS could not be held liable because the plaintiffs have not alleged
which individual or individuals within UBS”s corporate structure acted
dishonestly or fraudulently.
With respect to the claim in negligence, UBS says that a beneficiary
40	has no legal right to sue a trustee for the independent tort of negligence.
His only right is to sue for breach of trust, which would include a claim of
negligence.
UBS is a bank and trust company carrying on business in the Cayman
Islands, and was the former trustee of the subject pension trust. The plain-
45	tiffs, Publishers Representatives Ltd. and Lee Sku Kee (‘Publishers’), are

current trustees and beneficiaries of the pension trust. Publishers” primary
claim against UBS is for breach of trust arising out of UBS”s alleged
failure to disclose certain information to Publishers.
Publishers allege that between September 1985 and March 1987,
5	UBS”s trust officer, Mr. Barry Randall, committed frauds and serious
irregularities in relation to other trusts managed by UBS. In September
1986 Mr. Randall resigned from UBS but did not actually leave until
March 20th, 1987. However, by late 1986 UBS”s controller and internal
auditor, David Meyerhoff, commenced an investigation into Mr.
10	Randall”s dealings on the relevant accounts.
Before Mr. Randall left UBS, Mr. Meyerhoff discovered several irregu
larities for which Mr. Randall did not provide adequate explanations. Mr.
Meyerhoff reported this to UBS”s managing director and UBS became
suspicious as to the propriety and validity of the transactions and the
15	honesty of Mr. Randall”s conduct.
Mr. Randall became a shareholder and managing director of a trust
company called Cayman Capital Trust Co. (‘Cayman Capital’) on
February 20th, 1987. After he left UBS on March 20th he conducted
trustee work through Cayman Capital, and UBS knew this. On April 16th,
20	1988 UBS retired as trustee of the plan and Cayman Capital was
appointed as trustee in UBS”s place.
Publishers allege in para. 12.1 of the statement of claim that the state of
knowledge of UBS on or before April 16th, 1988 was as follows:
‘At the time of the said deed of removal and appointment,
25	namely on or before April 16th, 1988, the defendant knew or ought
to have known of Mr. Randall”s dishonest conduct committed whilst
in

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