Mar 2024
Just when trustees are feeling safe to go back into the water after the Hong Kong Court of Final Appeal spoke in Zhang Hong Li v. DBS Bank (Hong Kong) Ltd [2019] along comes Ivanishvilli v. Credit Suisse Trust Ltd [2023] where the Singapore Commercial Court held that Credit Suisse Trust as trustee of a Singapore law governed trust, was in breach of its duty to its client to safeguard the trust assets and to account to a record-breaking tune of US$926 million, reliving the thorny issues of a trustee’s duty in a “reserved power” trust and validity of anti-Bartlett trustee immunity clauses.
The Singapore case is part of a series of multi-jurisdictional legal proceedings between the plaintiff and the Credit Suisse group arising from the fraud and swindle by an ex-employee of Credit Suisse Bank who had managed the bank investment portfolio of the Trust – itself being part of the wealth management structure put together by the banking group for Mr Ivanishvilli. The crimes included embezzlement, purchasing securities above market price, signature forgery and transfer of monies to cover losses to other accounts he had caused leading to misappropriation and investment losses over a period of 9 years, all sought to be made whole from the trustee on the ground of breach of duty to safeguard trust assets.
Whilst the factual causation of the losses arising from the employee’s action were not disputed, the trustee focused on narrowing the extent of its role and duty in a “reserved power” trust where Mr Ivanishvilli was appointed as “investment manager”, relying also on the anti-Bartlett clause and the defence of contributory negligence.
The trustee asserted that as Mr Ivanishvilli was appointed “investment manager” of the trust and had reserved the power of managing investments which were thus “never vested” with the trustee. The Court rejected the reservation of power of investment to the settlor as “an all or nothing concept” and did not mean that the trustee will have no power of investment and no liability in respect of any losses resulting from the investment of the trust assets. It was found that appointment of Mr Ivanishvilli was intended to be an interim administrative measure in a discretionary investment portfolio account and not intended to displace the responsibility of the trustee to hold and manage the investment of the trust. Unlike the investment manager in Zhang, which mandated final say and control over investment decisions, the memorandum of wishes appointing Mr Ivanishvill was only permissive (“may have regard to his recommendations in respect of the investments…” ) and the trustee was found to have mostly retained that power or at the least on a shared basis.
The trustee’s attempt to use Zhang to reject a “high level of supervisory duty of trustee” on and above the coverage of the anti-Bartlett immunity clause, was found inapplicable because the Court found no such duty was imposed on the trustee which had already admitted to there being a causative breach of trust duty. The distinction between the trustee’s duty to monitor the “wisdom of the investments” and the trustee’s duty to safeguard the Trust assets was recognised with the former not being in contention in the case. Attempts by the trustee to redefine its duty to merely taking reasonable steps to “police the perimeters of the trust” was rejected as potentially introducing an “amorphous” and “ill defined concept of duty” (ironically the obiter in the Court of Final Appeal in Zhang) and incompatible with the “irreducible” core obligations of a trustee to act honestly in good faith for the benefit of the beneficiaries (Armitage vs. Nurse [1998] UK).
The anti-Bartlett clause might have been effective to protect the trustee from liability for any losses suffer in respect of the assets not in its control (say in the control of the investment manager), but would not protect the trustee from liability or losses suffered in respect of investment portfolio assets managed by the Bank, who exercised complete control. The close connection between the trustee and the Bank distinguished it from the facts in Zhang where as well as the failure to notify Mr Ivanishvilli and bring him in on earlier fraud suspicions and attempts to rein in the fraudulent employee, weighed on the Court’s findings.
The trustee also attempted to raise the defence of contributory negligence on the basis that the losses were partly contributed by Mr Ivanishvilli’s failure as a sophisticated investor to check the fraudulent employee, despite having received bank statements, updates and Excel spreadsheets and the minimal supervision exercised by Mr Ivanishvilli over the employee owing to familiarity and trust, albeit one that was misplaced. The Court rejected this on the reasoning that the breach of fiduciary/equitable duty as trustee to safeguard trust assets may not avail to a defence of contributory tortious negligence. On evidence, it was also found that Mr Ivanishvilli did not take it upon himself to micromanage the portfolio and displacing the duty and responsibility of the trustee and the employee portfolio manager – this was never the basis of their professional relationship. Mr Ivanishvilli had not actually exercised his investment manager powers and did not “look inside what was in the structure” and was only interested in “the bottom line”. The Court found the Bank to be “causatively potent and morally blameworthy”, such that it would not be “fair, just and equitable to attribute any proportion to the plaintiff” – a statutory element required to be met under the Singapore statute on the defence. Along a similar line, including noting the failure of the trustee to notify Mr Ivanishvilli and the beneficiaries of internal investigations and actions to rein in the employee much earlier, led to a rejection of judicial relief of the trustee from personal liability.
The verdict should come as no surprise. No doubt there will be an appeal. For now, Ivanishvilli co-exists with Zhang and are amicably reconcilable. Interesting to wonder if Ivanishvilli had extended jurisprudence in the line of cases on trustees duty and anti-Bartlett clauses or whether its effect is limited to unique facts – the manifest findings of employee fraud and the close affiliation with the trustee and connivance shadowed the judgement. The implications for the banking groups who still provide single umbrella full service trustee and asset management services are clear. Another lesson is the importance of delineating the shared and often commingled duty and responsibility of the client and the trustee for the preservation of trust assets in a “reserved power trust” and for the anti-Bartlett immunity to be clearly and finely tailored to match the specific circumstances of the relationship and not simply relying on the boiler-plate. Even with immunity as a shield, at its core, there remains an abiding obligation to have guardrails and proactively monitoring for improprieties and to intervene and involve the client as early on as possible especially where market values are at stake.