Trustees and investing during the COVID-19 crisis
Given the numerous obligations and liabilities heaped upon trustees, many will be wondering what they should be doing during this Covid-19 crisis whilst it is not business as usual.
To avoid breaching the duty of care they owe to beneficiaries, trustees must act wholly within the confines of relevant trust deeds and in accordance with wider trust law. Virtually all trustees must follow statutory rules on trustees' exercise of investment powers. Trustees holding investments cannot, in an unprecedented economic climate, simply sit back and leave decision-making to delegated fund managers.
Many (if not most) beneficiaries will see at least some reduction in their income (from trusts and other personal sources) or of capital available for distribution as a result of the enormous economic impact of the Covid-19 crisis. Beneficiaries will likely consider how they can recover losses in the aftermath of this episode and trustees should anticipate beneficiaries looking to them to make up any shortfall if they are able to argue that trustees have not been exercising their investment powers appropriately and reasonably during this episode.
While trustees may be able to rely on exoneration provisions in the governing trust documents (as was the case last year in Zhang Hong Li and others v DBS Bank (Hong Kong) Limited and others, a Hong Kong case that considered the risky investment policy of a Jersey trust around the 2008 global financial crisis), clearly the costs of litigation and reputation damage are detrimental and to be avoided. Trustees who are not found to have committed what amounts to an actual breach of trust, with corresponding loss to the beneficiaries, can nonetheless find themselves being criticised at Court for their approach. In Daniel and another v Tee and others (2016) the English High Court let the trustees off the hook in spite of their poor approach to risk when investing around the time of the dotcom bubble. However, the Court noted that only a slight variation in the facts could have changed that outcome.
Our Covid-19 trustee checklist provides a few specific points that trustees should be considering in the current crisis. Broadly, at the moment especially, trustees need to be reviewing trust investments, and in particular risk profile, in the context of beneficiaries' income needs and capital expectations. There should be engagement with fund managers and beneficiaries alike. It may be that beneficiaries' expectations for income in the coming year will need to be managed. Equally, planned capital distributions may be unwise if they require realising losses and could be deferred with beneficiaries' acquiescence.
It is worth reviewing trust documents to consider whether there is scope to vary the trusts if appropriate. All of these elements will need to be considered in the context of the general and specific trust provisions governing the trustees' powers and duties and the particular beneficiaries' circumstances. Ensuring that all reviews and decisions taken by trustees, including their reasoning, are properly documented may prove key to avoiding future claims from disaffected beneficiaries.
The primary message to trustees is that they must not wait for this episode to pass; engagement now is essential.
Click here for a PDF copy of our Covid-19 trustee checklist.
Please do get in touch to discuss any of the points raised above, or in our checklist.
The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.