Posted by: RM | May 29, 2009

“Dog-Leg” Claims

A fascinating case has recently come before the High Court: Gregson v HAE Trustees & Others. The case addressed two issues, the most interesting being whether or not a “dog-leg” claim could succeed. A beneficiary under a trust brought an action against a private trust company together with a number of directors of the company. The claimant sought damages for breach of trust as a consequence of the trust in which she had a beneficial interest becoming illiquid, consequent upon a family company, the shares of which made up the whole trust property, going into liquidation. The claimant won on the point that the trustees were under a duty to review the investments within the trust, but lost the essential point regarding a “dog-leg” claim.

So, what is a “dog-leg” claim? It is a claim by a beneficiary under a trust against the directors of a private trust company which is trustee of the trust. Why not sue the trust company? Very good point, but if they have no assets or insurance, it would be a pointless exercise. So what’s the problem with suing the directors? Separate legal personality, in short. All companies are independent legal entities and it is only in very rare circumstances that the corporate veil will be pierced, this not being one of them. Directors owe a duty to their company and shareholders, but the remedy for any breach lies with the company or the shareholders (in some circumstances at least, too complicated to recite here). So, why doesn’t the company sue the directors? This was a private trust company, established for the purposes of managing family trusts. Many of the directors are family members or friends. One disgruntled beneficiary (also a family member) cannot compel the company to sue its own directors if it doesn’t want to.

The concept of a “dog-leg” claim is a bit ingenious. The idea is that the directors of the trust company owe a duty to the trust company and in the event that the directors breach that duty the right of action which is vested in the trustee company becomes the property of the trust itself. Therefore, in the event of the trust company refusing or failing to bring an action against the directors, the beneficiaries may do so.

There is very little authority on this type of claim and what little there is seems to point to a “dog-leg” claim being a non-starter. It is quite understandable given that to allow such a claim would appear to offend the rule that the company is the appropriate defendant. However, the case does identify a problem in relation to the liability of trustees who act in breach of trust but are to all intents and purposes untouchable in any meaningful way.

Postscript: For a full case commentary on this case see the Denning Law Journal, 2009; full text available from Hein online

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