`It is a rule of universal application that no one having [fiduciary] duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with interests of those to whom he is bound to protect. Thus, the trustee or the manager is under a duty not to place itself in a position where there is an actual conflict of interests or where such conflict may potentially exist.

It follows from this general rule that a trustee or a manager must not enter into ’self-dealing’ transactions.” Except where market usage permits, the courts have never permitted a fiduciary, in the course of the same transaction, to approbate and reprobate on its undertaking by acting as a fiduciary on the one side, and as an undisclosed principal in its private capacity on the other. Thus, a manager cannot direct the trustee to use the trust fund to buy assets from itself or through its associate companies. Similarly, where the manager is an associate of an underwriter of a share issue, the manager may not direct the trustee to subscribe for the new shares when the sign of under-subscription occurs. Nor may it direct the trustee to buy from the underwriter when the subscription is unsuccessful if the purpose is to ‘dump’ unwanted securities to the unit trust. On the same basis, the trustee must not allow a loan to the manager itself. It is submitted that the trustee can refuse to use trust funds to buy shares of a related company of the manager which is a takeover target, where the motive of the manager’s direction to the trustee is solely to assist that company’s defence of the takeover bid.

FundsIn applying this self-dealing rule to a sale of trust property, the cases appear to draw a distinction between a trustee and other fiduciaries. A disposition of trust property to a trustee” is automatically voidable by any beneficiary ex debito justitiae,” irrespective of whether the disposition was by way of auction or at a price fixed by an independent valuation. This is ‘because no court is equal to the examination and ascertainment of the truth’. A purchase by a fiduciary, on the other hand, is valid if the fiduciary ‘can show that, in fact, he did not abuse his position, i.e. he gave the best price after making full disclosure of all material facts’. If these principles are applied blindly, it would produce the absurd result that, after disclosure to unitholders, the manager could direct the trustee to sell unit trust properties to itself at a fair price, while the trustee would be forbidden to buy trust properties despite the fact that it is the manager who alone can decide on a disposition.

The answer to the manager’s position is that disclosure and payment of a fair price alone may not suffice. Ultimately, it is a question whether the manager has abused its position. If it has, the trustee may refuse to follow its direction.

As far as the trustee of the unit trust is concerned, if the decision in Holder v. Holder is an indicator, it is possible that the court may depart from the strictness of the rule. In this case, the Court of Appeal held that an executor, who purported to renounce his executorship in circumstances where (on admission of counsel) such renunciation would be ineffective, was not in breach of trust when he purchased the trust property. The reasons of Harman Lis decision were ‘that the beneficiaries never looked to [the renouncing executor] to protect their interests[,] . . . that the price paid was a good one. . . . Further, the [other executors] were not influenced by the [renouncing executor] in connexion with the sales.’ Sachs LJ went further:

. . . I agree with Danckwerts in his comments on that part of the foundation of the rule which stems from the alleged inability of a court to ascertain the state of mind of a trustee: and am inclined to the view that an irrebuttable presumption as to the state of his knowledge may no longer accord with the way in which the courts have now come to regard matters of this type. Thus the rigidity of the shackles imposed by the rule on the discretion of the court may perhaps before long be reconsidered as the courts tend to lean more and more against such rigidity of rules as can cause patent injustice . . .

Apart from Holder v. Holder, there is also authority to suggest that the rule is not an absolute one. Underhill and Hayton take the view that:

[t]he rule as to selling to himself only applies where the express or constructive trustee is substantially an active trustee. He may purchase where he is the mere depository of the legal estate without any duties, and without ever having had any…

The example given in the footnote of this statement is a trustee to preserve contingent remainders and the authority is the old case of Sutton v. Jones. Unfortunately, the issue in this case was whether a trustee to preserve contingent remainders might be appointed to a remunerative position, not whether he might purchase. Perhaps, a stronger authority is Re Boles and British Land Co.’s Contract, which was not cited in Holder. In this case, Buckley J permitted a trustee who had retired for twelve years to purchase, despite the fact that the self-dealing rule had been applied to retiring trustees. His Lordship explained:

The principle that lies at the root of this matter is that a trustee for sale owes a duty to his cestuis que trust to do everything in his power for their benefit, and is therefore absolutely precluded from buying the trust property, irrespective of questions of undervalue or otherwise, because he may be thus induced to neglect his duty. Beyond that, if he retires with a view to becoming a purchaser so as to put himself in a position to do what would otherwise be a breach of trust, that will not do. But if he has retired and there is nothing to shew that at the time of the retirement there was any idea of a sale, and in fact there is no sale for twelve years after his retirement, is there anything to prevent him from becoming a purchaser? I think not.

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The ‘No-Conflict’ Rule