Chancery law

By Dov Ohrenstein, 3 New Square, London

Shareholders claims, corporate losses and exemption clauses.Walker & Others v Stones & Others, The Times, 26 September 2000The Court of Appeal has clarified the principles as to when a company shareholder can bring an action for damages in circumstances where the company has also suffered loss.

This decision also limits the effectiveness of trustee exemption clauses, at least for solicitors and other professional trustees.

The claimants were beneficiaries who brought an action for breach of trust against trustees who had caused the value of a trust shareholding in a company to be diminished by improper diversions or use of the relevant company's assets.

At first instance, Rattee J had followed the well-established principle found in Prudential Assurance v Newman [1982] Ch 204 that a shareholder in a company could not sue for damages in respect of any diminution in value of the shares held by him caused by a wrong to the company when the company itself had a cause of action entitling it to recover for the wrong committed.

However, the Court of Appeal has now held that the Prudential Assurance principle should not operate to deprive a claimant of an otherwise good cause of action where: (1) there was a breach of a personal duty (whether in contract, tort or in trust) to the claimant; and (2) the breach had caused the claimant a personal loss which was separate and distinct from any loss that might have been suffered by a company in which the claimant had a financial interest either directly as a shareholder or indirectly as a beneficiary under a trust.

If those two conditions were satisfied, the mere fact that the company might also have a cause of action would not deprive a claimant of his claim.

The amounts claimed by the claimant beneficiaries in this case overlapped at least in part with amounts that might be claimed by the relevant company.

Nevertheless, the Court of Appeal decided that the beneficiaries were entitled to pursue their claim.

The Court of Appeal also considered the effects of a trustee exemption clause which professed to exclude liability for anything done 'in the professed execution of the trusts and powers hereof' other than dishonesty.

The claimants argued that the clause only protected against unconscious or accidental breaches of trust, since if a trustee knew that he was acting beyond his powers he could not be acting in the execution of his powers.

While it was held that the clause applied to exonerate the trustees for anything done by them in the purported execution of the trusts and powers of the trust deed even though not in fact done in the exercise of such trusts or powers, the Court of Appeal gave a broad interpretation of dishonesty.

Despite that fact in Armitage v Nurse [1998] Ch 241 Millet LJ had said that a deliberate breach of trust was not fraudulent if committed in good faith and in the honest belief that it was in the interest of beneficiaries, the Court of Appeal has now qualified this in cases where the so-called 'honest belief', although actually held by a solicitor trustee, is so unreasonable that by any objective standard no solicitor trustee could have thought that what he did was for the benefit of beneficiaries.

Accordingly, a trustee who acted with the specific intention of benefiting persons whom he knew not to be objects of the trust, in the knowledge that this would be at the expense of beneficiaries, could not invoke a trustee exemption clause such as the clause in the present case.