Irwin Mitchell Trust Corporation v PW & Anor

This general principle was restated by the House of Lords in Boardman v. Phipps [1967] 2 AC 46 per Lord Upjohn at 123:

The consequence of this rule, and the underlying rationale for it, is that transactions entered into where the fiduciary's duty conflicts with their interests are capable of being set aside as of right by their principal. This is 'the self-dealing rule.'

Conversely, the law of agency generally provides that an act of an agent may rank as the act of the principal if the principal ratifies it, either prospectively or retrospectively, presupposing that that the principal could validly have done the act at the time it was done and the relevant act was voidable rather than void. 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, as articulated by Lieven J in Riddle v. Public Guardian [2021] ECOP 38 at 30-34, is found in the conjunction of sections 15(c) and 19(4) of the Mental Capacity Act 2005.

F. THE QUESTION(S) FOR DETERMINATION

By the order made on 30th August 2023, the questions identified by the parties for determination in these proceedings are set out in a schedule [ 19 ] as follows:

(1) Does the appointment by the Deputy of IMAM as investment manager for [PW] require ratification by the Court?

(2) Is the answer to (1) affected by:

(3) If the answer to (1) is affected by the process referred to at (2)(b), then:

(4) If the appointment of IMAM does require ratification:

(5) If the appointment of IMAM is not to be ratified, what further consequential directions need to be given in respect of the consequences of that decision in relation to (a) [PW] and (b) other cases?

(6) Is there any further guidance that the court can provide as to the steps that should be taken by (a) the Deputy and (b) other deputies for property and affairs when appointing investment managers?

The Applicant's case, as set out in Mr. Rees' position statement at paragraphs 42 and 43, is:

The ordering of these two alternatives strikes me as logically surprising. The argument in reliance on Re MWS rests on the basis that there was something for Senior Judge Lush to "authorise" - ie acceptance of an actual conflict of interest. Accordingly, whilst acknowledging that IMTC chooses to prioritise its arguments as it does, I shall consider the alternative argument first.

PW's case is that:

The Public Guardian takes a position full square behind the Official Solicitor.

So, the primary question which I am now asked to determine is whether the conflict of interest rule applies to the appointment by IMTC as deputy of IMAM as asset manager for PW's funds: ie would a reasonable man looking at the relevant facts and circumstances of this particular case think there was a real sensible possibility of conflict?

If the answer to the primary question is "no, the conflict of interest rule does not apply here", then that is the end of the matter. The appointment of IMAM stands, without any need for further order.

However, if the answer to the primary question is "yes, the conflict of interest rule applies here", then the next question to be determined is whether the Court should now authorise the appointment of IMAM, with retrospective effect?

Whatever the answer to that second question, there will be consequences to consider. At this stage, the Court does not have evidence to address those issues and has heard no submissions on them. As indicated at the hearing, further directions and probably a further hearing will be required.

G. "REAL SENSIBLE POSSIBILITY OF CONFLICT": RELEVANT LAW

The parties agree that there is no direct English authority on the question of whether the engagement by a fiduciary of a related investment company presents "a real possibility of conflict of interest."

Mr. Dew for PW says that this may be because the point is trite.

IMTC however casts its net more widely. IMTC accepts, and has always accepted, that its engagement of IMAM gives rise to "a theoretical potential " (emphasis in the position statement) for a conflict of interest; but it contends that there is no "real sensible possibility" of conflict because it has adopted procedures which eliminate that potential. In support of that position, Mr. Rees for IMTC relies on "two very relevant authorities from other jurisdictions":

With the greatest of respect to each of the judges and jurisdictions, neither of these authorities is binding on me. Neither am I persuaded by them.

In the absence of any binding authority otherwise, the acceptance of "theoretical potential" for conflict of interest in engagement of IMAM by IMTC requires me to consider whether processes adopted by IMTC have in fact extinguished any "real sensible possibility" of the theory being realised.

H. "REAL SENSIBLE POSSIBILITY OF CONFLICT": PROCESS

The evidence as to the process(es) adopted by IMTC when considering the engagement of IMAM has not been disputed.

The Applicant's position

IMTC invites the Court to have regard to "the fact that [it] is a highly experienced deputy well used to taking decisions regarding the investment of assets and the appointment of investment advisers (irrespective of whether IMAM is itself under consideration)" [ ps para 43 (6) ]. I do so.

IMTC asserts that it is not alone in using a linked financial adviser or investment manager. Although the Office of the Public Guardian does not keep records of such situations [ 246 ], there is reference in the evidence before the Court to the use of in-house financial advisers at another firm [ 218 ] and to "joint ventures" and arrangements whereby deputies are "expected" to include a specific investment firm on their panel [ 438 , 439 ]. I am aware of general interest in these proceedings. The Chair of the Professional Deputies Forum sent me a news journal report, which I have shared with the parties, and there have been more observers than usual at the hearing. I do not understand IMTC to be arguing that its approach must be acceptable because others are doing similar things (which would not be persuasive), but I do recognise a cautionary reminder that the decision in respect of PW is likely to have wider repercussions.

IMTC acknowledges that:

IMTC's contention is that there is in fact "no real sensible possibility of conflict" because any potential conflict is effectively extinguished by the procedures it has adopted:

"We are experts in the Personal Injury market. Currently 95% of the clients we look after are in receipt of personal injury awards. Of the 95% over three quarters are protected parties with Deputies or beneficiaries of Personal Injury Trusts.

Irwin Mitchell are the largest law firm specialising in Personal Injury work, and will use IM Asset Management based on its own merits to cater for their client's specialised financial needs."

The Applicant deputy points to the outcomes of this process as confirmation of its robustness: even where IMAM is within the pool of potential investment managers under consideration, there are many cases where IMAM is not appointed. IMTC's evidence [ 44 ] is that, as at July 2020:

Given the evidence in the same statement [ 38 ] that IMTC "acts as deputy for a very large number of individuals (currently 990)", which accords with the Court's general awareness, it seems to me that the evidence quoted at (d) above cannot be accurate – 45% of 990 is very significantly higher than 90, so the 56 and the 34 added together cannot be 45% of the caseload. This brings into doubt the accuracy of the broader explanation.

Even before considering the other evidence, IMTC's account of the process(es) it adopted invites some further cautionary observations:

The expert evidence

James Mann is an independent financial adviser at Dune Financial Planning Ltd. with "extensive experience" of working with professional deputies. He was jointly instructed by the parties to report on:

In a report dated 21 st November 2023 [ 423 ], Mr. Mann :

I heard from Mr. Mann in oral evidence. I am satisfied that he did his best to answer everything that was asked of him. Given that I am not determining the merits of IMAM as an investment manager, much of his evidence was at this point of limited assistance to the Court.

IMTC "is concerned" about Mr. Mann's evidence, in particular that he "fails to recognise the particular issues with the investment of personal injury awards for incapacitated individuals", including the importance of cost and the limited number of firms with expertise. In my judgment these concerns do not carry much weight:

I note Mr. Rees's oral submission that the Court cannot ask for further explanation of Ms. Lomas' comment in the attendance note because she was not required by the respondents to attend to give oral evidence. Mr. W's preference for IMAM may indeed have been "fortuitous" because IMAM was afforded the highest score. However, Mr. Mann's reference to it when considering scope for bias is unsurprising because it lends itself to other interpretation.

The evidence of other deputies

The parties were permitted to invite "no more than four" professional deputies to provide statements setting out the steps they take when appointing an investment manager for P. Three such statements have been filed, all of them by deputies recognised by me as frequent users of the Court of Protection.

Samantha Hamilton of Mullis & Peake LLP provided a statement dated 3 rd October 2023 [ 206 ], from which I draw the following salient points:

Hugh Jones of Hugh Jones Solicitors provided a statement dated 17 th October 2023 [ 210 ], from which I draw the following salient points:

Martin Terrell of Warners Solicitors provided a statement dated 25 th October 2023 [ 227 ], from which I draw the following salient points

It is striking that none of the deputies whose statement was filed expressed any view in support of instructing a related investment manager.

IMTC contends that "having regard to the evidence of general practice" from the three deputies' statement, the procedure employed by IMTC is "robust" [ ps para 18 ]. I do not agree. The crucial difference between the IMTC process and those described by the three deputies is that their processes do not involve a potential provider with whom they are connected. In my judgment, this makes the IMTC process less robust than general practice.

The position of the OS for PW (supported by the Public Guardian)

The position taken on behalf of PW is clear and unambiguous [ ps para 2 ]:

Mr. Dew posits that the reasons for a law firm creating and operating an asset management firm are clear from Irwin Mitchell's annual report and accounts. Having an asset management firm means that profits which would otherwise accrue elsewhere instead remain 'in-house' [ ps para 3 ]. Herein lies an actual conflict of interest [ ps para 28 ]:

Putting values to that conflict in the particular case of PW, Mr. Dew pointed out that IMAM's fees were 1.89% per annum [ 54 ]. On a "rough average" of the sum invested overtime, that equates to fees of around £9 450 per annum.

PW's representatives assert that IMTC's process(es) are not capable of excluding "inevitable biases" [ ps para 32 ] involved in appointing a connected asset manager. The process(es) include "a considerable degree of subjective considerations" and, being so regularly exposed to it, IMAM will - unlike its competitors - know very well which boxes it needs to 'tick'. The views of family members are relevant to best interest decision making but they have no application to existence or otherwise of a conflict of interest. The OS's concern is that what IMTC has attempted to do - wrongly - is to treat members of the family as if they were the person for whom it is appointed, capable of consenting to the conflict of interest.

The actual conflict of interest would only be "wholly extinguished" in the following circumstances [ ps para 42 ]:

Conclusion

The Court of Protection is no stranger to conflicts of interest. It has been said that they are ubiquitous to mental capacity jurisdictions – see Senior Judge Lush in Re JW; GGW v. East Sussex County Council [2015] EWCOP 82 as cited by me in Re ACC [2020] COPLR 424 at 40.

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 (with all the duties which that implies) 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.

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.

If the processes adopted do not remove the benefit to IMTC, how can they be said to reduce the situation to no 'real sensible possibility' of conflict? The answer to this question must lie in interpreting IMTC's case along these lines: that its processes ensure that its client ends up with the best financial adviser, and therefore there is no 'conflict' of interest when IMAM is appointed because its own interests and the interests of the person for whom it acts as deputy are aligned. Unfortunately, in my judgment this viewpoint cannot be sustained. It is laden with value judgments of the very type which Lord Hershell identified as underlying the rule against self-dealing. The fiduciary is still making the appointment, from which it still benefits.

Does it matter, if investment management fees have to be paid somewhere? In my view it does matter. That fees will fall to be paid at all does not extinguish the risk which Lord Hershell identified. More particularly, I am not persuaded by IMTC's assertion that total exclusion of IMAM from consideration would be contrary to PW's best interests because of the limited size of the field of potential investment managers. There are more specialist firms on IMTC's panel than are ever invited to a beauty parade – 10 on the panel; 3 or 4 in the parade. Mathematically, excluding one from the 10 still leaves more than twice the number needed to run the usual type of beauty parade. Since IMTC must be of the view that a choice from 3 or 4 candidates is sufficient, its argument of detriment by reducing the field to 9 lacks credibility.

IMAM is only included in IMTC's process for selecting an investment adviser where there is a family member who does not object. It must follow that the inclusion of the family member is considered by IMTC to be key to reducing the theoretical risk to the level of no 'real, sensible possibility.' What basis is there for placing such weight on family participation? I agree with the Official Solicitor that IMTC appears to be treating the family member as conferring some sort of ratification, when the family member can do no such thing. The family member is not the principal in the fiduciary relationship. Only the Court can stand in the shoes of the principal for the purposes of ratification. Taking into account the views of family engaged in caring for the person for whom IMTC acts or otherwise interested in their welfare is the right thing to do pursuant to section 4(7) of the Mental Capacity Act but, as I have already noted (at paragraph 42(a) above), it is necessary to be cautious about the effective scrutiny which a family member in reality brings to bear on the question of conflict of interest. I am not persuaded that it does anything to reduce a 'theoretical potential' conflict of interest to a non-existent one.

Taking into account all the evidence in respect of IMTC processes, in my judgment there remained a very clear, not remotely fanciful, actual conflict of interest in IMTC appointing IMAM to manage PW's funds. IMTC's processes were not capable of extinguishing, and did not extinguish, that conflict.

So the next questions for determination are:

I. THE ARGUMENT OF EXISTING AUTHORISATION

IMTC asserts that , when the decision to appoint IMAM as investment manager for PW was taken, it understood that both the Court of Protection and the Public Guardian were satisfied that the theoretical potential for conflict of interest could be appropriately managed and did not operate as an absolute bar to its engagement of IMAM [ ps para 21 ] ie that such appointment could be made without breaching any rules of conflict of interest. (I assume that this contention includes the inference that such understanding was reasonable.)

IMTC's assertion rests on a number of pillars:

The position of the Public Guardian : in written evidence for these proceedings the Public Guardian broadly accepts IMTC's description of the position taken by her office over time. Adam Lawson, Head of the OPG's professional supervision team, acknowledges [ 245 ] that "[w]hen a deputy has wanted to appoint an independent adviser who has a link to their firm, it has previously been the position that the Public Guardian would expect there to be a beauty parade carried out, so as to limit the impact of any potential conflict of interest. Previous Public Guardians have been satisfied that this mitigates the risk." It is not possible to give data about the number of cases where a connection has been identified between a deputy and an investment manager because records are not kept in a format which is searchable by that criteria. However Mr. Lawson makes reference to one previous case (which I recall) where there was a personal relationship between the deputy and the investment manager: an application to discharge the deputy was made, and the deputy agreed to step down in all cases.

In February 2023 in the wake of Re ACC, a new guidance document was published by the OPG, which provides that:

In all respects the Public Guardian now supports the Official Solicitor's position.

The Official Solicitor's position is that neither the decision in Re MWS nor the communications which followed can reasonably bear the interpretation for which IMTC contends:

Moreover, insofar as the OPG made no interventions when engagement of IMAM featured in an annual report about an IMTC deputyship, the Official Solicitor notes that this "does not confer any kind of ratification or blessing and does nothing to override the underlying conflict of interest. It does not affect the fundamental analysis." [ ps para 39 ]

Conclusion

I accept that there has been development over time of the approach of the Court of Protection to investment practices. The implementation of the Mental Capacity Act 2005 fundamentally altered the landscape. I also accept that management of damages awards is a specialist expertise, significantly different to the management of earned or inherited wealth, with a relatively small pool of firms offering such expertise and experience. However, there is a limit to the impact of these accepted points: fiduciary duties are well settled, as demonstrated by the age of the authorities cited above as fundamental propositions, and the pool of specialist firms is not so small that IMTC cannot maintain a standing panel more than twice the size of the numbers considered appropriate to engage in a beauty parade.

The written judgment in Re MWS is unequivocal (at paragraph 23) that there is a conflict of interest in appointment of IMAM by IMTC as deputy.

The written judgment in Re MWS is unequivocal (at paragraph 25) in its rejection of the general authority which was sought in that matter. It must be inferred that IMTC understood this because the system there proposed, namely engaging an independent verifier, is not part of the processes on which IMTC relies in these proceedings.

IMTC's professed understanding of any general 'ratification' at all must therefore stem from the e-mail exchange. I agree with Mr. Dew that such informal communications, without input or even awareness of the other parties to proceedings, are not capable of establishing any binding authority. That they took place at all is probably best put down to a lingering cultural hangover from a time when the Court of Protection was an Office of the Supreme Court, as opposed to the independent court of record which it is now. In any event, I do not accept that these e-mail communications can bear the interpretation which IMTC places on them:

Although IMTC's 'understanding' is unjustified on the basis of the evidence now before the Court, it is also fair to acknowledge that Mr. Lawson's evidence does not sit comfortably with the written judgment in Re MWS . In so far as "previous Public Guardians have been satisfied that" a beauty parade "mitigates the risk" where a deputy has wanted to appoint an independent adviser who has a link to their firm, I note that this is quite different to - considerably less robust than - the third option proposed by Senior Judge Lush, which expressly envisaged an application to the Court and independent representation of the protected person (by 'a panel deputy to act as P's litigation friend') in that parade. I further note however that the OPG has now rethought this position, and in any event I agree with Mr. Dew that non-intervention by the OPG is not sufficient to confer ratification or override the underlying conflict.

As to the three options proposed by Senior Judge Lush:

I reject IMTC's contention that the appointment of IMAM for PW has somehow been pre-authorised by Senior Judge Lush. In my judgment there is nothing in the judgment in Re MWS , or in any subsequent e-mails, which did or could confer such ratification. And there is nothing in the Public Guardian's position to date which did or could do so either.

J. SHOULD THERE BE RATIFICATION NOW?

As Mr. Rees puts it [ ps para 38 ]:

Having determined that the appointment of IMAM was made in breach of the self-dealing rule, the appointment of IMAM for PW could, however, be set aside. Instead, IMTC asks the Court to exercise the power that PW could exercise if she had capacity to do so, to authorise a prior self-dealing.

Mr. Dew points out that the fundamental problem with ratifying the appointment of IMAM for PW is the absence of any evidence showing that to do so would be in her best interests. It seems to me that this is a consequence of the way IMTC has so far framed its case, namely that ratification would not be required, either because it has already been given on a general basis or because any potential for breach of the self-dealing rule was extinguished. Having found against IMTC on both those points, where does the Court go next to identify where PW's best interests lie?

Mr. Dew contends that the decision has to be taken "as of now " [ ps para 46 ] – the question is not whether the Court would have ratified the appointment of IMAM for PW in 2017, but whether it is in her best interests to do so more than six years after the event. Relevant considerations include that PW "has a potential claim to repayment of the charges levelled by IMAM for managing the funds" [ ps para 46.2 ] and "whether some other asset manager (or adviser) could have better invested the funds during the period of time over which the assets were invested as well as the expectations going forwards" [ ps para 46.3 ].

Such considerations are far from straightforward but the Court could begin to address them if there was evidence on such points. On one level, the absence of it now is surprising, given the issues as agreed between the parties set out in the schedule to the 30 th August 2023 order, particularly 4(c). However, I acknowledge, that at the time that order was made, the parties had actually sought a directions hearing, whereas I considered it more appropriate to list this hearing. Before determining whether further directions are now required, it is necessary to consider Mr. Dew's submissions about "ratification more generally" [ ps paras 51 – 54 ].

Mr. Dew submits that IMTC has failed to show why "more generally" it is in P's interests "to have appointed a connected asset manager." Unlike the limited circumstances of instructing a connected law firm which were approved in Re ACC, "a single, one-off approval from the Court at the time of appointment [of a linked asset manager] will not safeguard P's financial interests in the long term and so exposes P to the conflict for, potentially, the whole of their lifetime." It seems to me that the regular reviews of arrangements which are a conventional aspect of investments generally would, in circumstances amounting to a conflict of interest, require ratification just as much as the original appointment.

To put it another way, the unavoidable consequence of rejecting IMTC's arguments in this matter is that each and every occasion of IMTC appointing IMAM amounts to a breach of self-dealing rule unless and until it is ratified by the Court. This is in accordance with well-established principles of agency and was recognised in Senior Judge Lush's third option in Re MWS . It seems to me that there is nothing novel or surprising in it. However, that process of seeking court ratification itself incurs costs – cost which are completely avoidable simply by excluding a connected asset manager from consideration. Consequently, as a matter of generality, there is material dis advantage to any protected person for whom IMTC is appointed deputy in considering IMAM as a potential investment manager. (Given my conclusion at paragraph 65 above, the only dis advantage of ex cluding IMAM is to the Irwin Mitchell group. Therein lies the conflict of interest.)

Given the agreement as to costs so far in this litigation, it might be said that the 'general' ratification problem does not apply to PW. That would be correct to this point, but would depend on further extension of the agreement to cover continuation of these proceedings.

I come to the conclusion that I do not presently have sufficient evidence before me to be satisfied that ratification of the appointment of IMAM for PW is in her best interests but the parties ought to be given an opportunity to take stock in the light of this judgment. Therefore, no such ratification is presently granted and I invite the parties to seek to reach agreement as to further directions (at least as far as listing a hearing to consider further directions if they cannot be agreed) if IMTC wishes to pursue its application for ratification further.

K. SUMMARY AND CONCLUSIONS

I am grateful to counsel for the clarity and courtesy with which the competing arguments have been set out.

In my judgment the appointment by IMTC of IMAM to manage the assets of PW clearly conflicts with the rule against self-dealing. There is actual conflict of interest in that the Irwin Mitchell group gains financially. There is nothing in Re MWS or subsequent e-mail communications which can reasonably be understood as approval of appointment of IMAM if it follows a beauty parade in which a family member of a protected person participates. 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.

Having determined the wider arguments, I am not satisfied that there is presently sufficient evidence before the Court to determine whether the appointment of IMAM for PW should now be ratified. I invite the parties to agree such further directions as they can, at least as to the listing of a further directions hearing if they do not agree anything more substantive, and to file a COP9 application with a draft order within 21 days of this judgment being handed down.

HHJ Hilder