Conflict and “The Tendency To Be Swayed By Human Nature Rather Than Duty”

Irwin Mitchell Trust Corporation v PW (By Her Litigation Friend The Official Solicitor) and The Public Guardian [2024] EWOP 16

Marisa Lloyd and Lucy Evanson summarise and comment on the judgment on Irwin Mitchell Trust Corporation v PW (By Her Litigation Friend The Official Solicitor) and The Public Guardian [2024] EWOP 16 in which Marisa represented the Public Guardian

Full Judgment here - https://www.bailii.org/ew/cases/EWCOP/2024/16.html

The court considered self-dealing and conflict in circumstances where Irwin Mitchell Trust Corporation (‘IMTC’) acting as deputy for PW, appointed Irwin Mitchell Asset Management (‘IMAM’) to manage the investment of PW’s funds.  

Factual background

PW suffered global cognitive impairment which resulted in a loss of capacity. After a successful claim against the treating healthcare trust, she received significant damages. IMTC was appointed as her property and affairs deputy and subsequently held a ‘beauty parade’ after which the deputy appointed IMAM as investment manager for PW.

In 2019, IMTC made an application to the Court of Protection for authority to execute a statutory will for PW. Concerns were raised by the Official Solicitor (‘OS’) about the appointment of IMAM as investment manager. IMTC was directed to make an application to seek retrospective authority to instruct IMAM. The Public Guardian was joined as a party.

Legal background

Section 19(6) of the Mental Capacity Act 2005 (‘the MCA’) provides that, ‘A deputy is to be treated as P’s agent in relation to anything done or decided by him within the scope of his appointment’. HHJ Hilder noted that “the relationship between a deputy and the person for whom the deputy is appointed is a fiduciary one”.

The basic proposition about the position of a fiduciary in a position of conflict was set out by Lord Herschell in the House of Lords decision of Bray v Ford [1896] AC 44 at 51-52, ‘It is an inflexible rule of a Court of equity that a person in a fiduciary position… is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect.’

The general principle was restated in Boardman v Phipps [1967] 2 AC 46 which also referred to Aberdeen Railway v Blaikie (1854) UKHL 1 Macq. 461 at 136 per Lord Cranworth LC who said  ‘and it is a rule of universal application, that no one, having such 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 the interests of those whom he is bound to protect.’

HHJ Hilder considered the law of agency stating: ‘Conversely, the law of agency generally provides that an act of the agent may rank as the act of the principal if the principal ratifies it … Where the principal lacks capacity to make decisions about their property and affairs, only the Court of Protection may grant such ratification. Its jurisdiction for doing so … is found in the conjunction of sections 15(c) and 19(4) of the Mental Capacity Act 2005.’

The Question

There were several questions agreed between the parties but the predominant question for HHJ Hilder to determine was whether the rule relating to conflict of interest was applicable to the appointment of IMAM by IMTC.

Decision

There is no English authority that directly deals with the question of whether the engagement by a fiduciary of a related investment company presents ‘a real possibility of conflict of interest.’ IMTC accepted that its engagement of IMAM gave rise to the ‘theoretical potential’ for a conflict of interest, but contended that there was “no real, sensible possibility” of conflict because it had adopted procedures by holding a beauty parade etc. which eliminated that potential. Counsel for the OS and PG disagreed contending that there was an actual conflict that was not mitigated by the processes followed by IMTC.

Having reviewed the evidence, HHJ Hilder held that :

61. The Court of Protection is no stranger to conflicts of interest…

62. The conflict of interest in question in this matter comes down to IMTC being financially better off if IMAM is appointed. IMTC accepts this as a “theoretical potential”. IMTC’s argument is that such potential is extinguished to the point of no “real sensible possibility” because of procedures it has adopted. Yet nowhere in the development of those processes or in these proceedings has IMTC ever denied either that the decision to appoint IMAM is made by IMTC in its fiduciary role… or that, even with full implementation of those processes, IMTC is better off if IMAM is appointed. At a most basic level, those two concessions amount to recognition of the existence of a conflict of interest: one plus one makes two.

63. The processes which IMTC has adopted when considering the appointment of IMAM do not target the substance of the self-dealing rule: that is, they do not remove the financial gain to IMTC. Such processes could have been adopted, for example by agreeing to waive any fee to IMAM where the instruction comes from IMTC as deputy. Then there would be no financial advantage to IMTC in the instruction of IMAM, no interest to be in conflict with the interests of the person for whom IMTC acts. Of course, I recognise that the Irwin Mitchell group would be likely to reject this approach as lacking commercial sense but that merely reinforces the existence of IMTC’s interest in the appointment of IMAM.

After further discussion of the processes adopted by IMTC, and the involvement of a family member in a beauty parade in ratifying or reducing the ‘theoretical potential’ of conflict of interest, HHJ Hilder concluded that there was a ‘very clear, not remotely fanciful, actual conflict of interest in IMTC appointing IMAM to manage PW’s funds,’ [67] This breached the self-dealing rule. She concluded that  ‘The processes adopted by IMTC do not and could not extinguish that conflict. In my view, that these proceedings have been necessary at all is a paradigm example of Lord Herschell’s wise recognition of the tendency of human nature to be swayed by interest rather than duty.” [93]

Commentary

The judgment confirms that there is a conflict of interest in a trust corporation instructing a connected company to act as an investment manager. The issue of conflict cannot be mitigated by conducting a beauty parade which includes the connected company. Further, the appointment cannot be ratified by a family member.  Ratification must be carried out by the Court.

The Public Guardian has already changed her guidance in the wake of Re ACC [2020] EWCOP. This reflects the view of the PG that, if financial advice is provided by a member of the deputy’s firm, potential conflicts of interest must be considered in the context of adhering to fiduciary duties,  and where the deputies own interest and the interest of P are linked there must be an application to court for authorisation to instruct your own firm.

There was insufficient evidence before the court to determine whether the appointment of IMAM was in PW’s best interests and should be ratified or whether it should be set aside. This will need to be determined in the future.

However, there are many other cases where IMTC and other trust corporations have instructed connected companies. These cases will need to be reviewed and consideration given to the way forward. Given the need for court ratification of existing cases and prospective approval in respect of future new instructions, it may be viewed as highly unlikely that the ongoing instruction of connected companies can be justified as being in P’s best interests. In my view, it follows that  in the absence of a successful appeal, this judgment is likely to signify the end of instructions of an asset manager from connected companies to the deputy.

Further, the judgment may also be viewed as relevant to the question of whether professional pension scheme trustees associated with firms providing other professional services can properly appoint their own firms to provide services.