‘One plus one makes two': Court of Protection finds conflict of interest within law firm structure
Irwin Mitchell Trust Corporation v PW & Anor [2024] EWCOP 16
Introduction
The Court of Protection handed down a judgment in March 2024 concerning a law firm, Irwin Mitchell, who acted as a professional deputy whilst also offering asset management services through an affiliated company within its structure. Having considered the underlying legal principles, the Court of Protection determined that a conflict of interest was present in such an arrangement and could not be overcome unless the affiliated asset management company did not charge for its services.
The case has undoubtedly caused a stir for law firms who operate, or are considering operating, in a similar way to Irwin Mitchell. However, it potentially also has further-reaching implications for all kinds of fiduciary relationships and fiduciary service providers where possible conflict issues have not been fully appreciated.
This article will detail the background of the case, introduce the legal concepts of conflict of interest and self-dealing and will summarise the Court’s reasoning in the judgment.
Corporate structure
In this case, the law firm in question was Irwin Mitchell LLP. Its company structure was summarised by way of a diagram in the judgment but essentially the firm’s trust corporation (‘IMTC’) appointed Irwin Mitchell Asset Management (‘IMAM’) to manage individuals’ assets for whom IMTC is a professional deputy for property and financial affairs. Irwin Mitchell LLP would be instructed in relation to the legal matters and, from a client’s perspective, would be the entity they are dealing with on a day-to-day basis.
Because IMTC is a wholly owned subsidiary of Irwin Mitchell LLP, and Irwin Mitchel Holdings Ltd is both a controlling member of Irwin Mitchel LLP and the sole owner of IMAM, the question was raised in the Court of Protection whether IMTC was able to act without a conflict of interest where it instructed IMAM to look after the relevant person’s assets.
Case background
Where someone is the subject of a property and financial affairs deputyship application (a court application for someone else to be appointed to manage their property and financial affairs) that person is called a ‘protected party’.
The protected party in this case was PW. PW contracted viral encephalitis in 2005 which caused her to sustain a significant cognitive impairment. With Irwin Mitchell LLP’s assistance, PW received compensation in respect of that injury of £1.85 million plus periodical payments rising to around £150,000 a year.
In March 2017, IMTC was appointed as PW’s property and financial affairs deputy who shortly afterwards appointed IMAM as an investment manager for a significant part of PW’s compensation. IMAM charged around 1.89% annually on the invested monies as its fee.
In 2019, IMTC applied to the Court of Protection as PW’s deputy to obtain a statutory will for her (because PW did not have mental capacity to make a will herself). As is standard practice in such applications, the Official Solicitor was appointed to act as the litigation friend for PW and in the course of that application raised concerns about IMAM being appointed to manage PW’s investments. IMTC was directed by the Court of Protection in June 2020 to make an application to seek retrospective authority for appointing IMAM to the role, which it did later that year. Following delays attributable to funding issues, that application was heard in March 2024.
Deputies: fiduciary duties and possible conflicts of interest
As set out in section 19(6) of the Mental Capacity Act 2005, a deputy is to be treated as the protected party’s agent. This is a fiduciary relationship and accordingly, as was a central issue in this case, IMTC owed fiduciary duties towards PW and any other person for whom it was a deputy.
A deputy (like all fiduciaries) should not enter into engagements in which they have or can have a personal interest conflicting, or which possibly may conflict, with the interests of the protected party, unless they are expressly authorised to do so (known as the ‘self-dealing rule'). Transactions where such a conflict exists are capable of being set aside by the court. As a matter of agency law, a principal may ratify the conflicted acts of an agent, but only the Court of Protection can ratify conflicted acts by a deputy (as opposed to the protected party, who lacks capacity, or a family member).
In the Irwin Mitchell case, the Judge presiding, Her Honour Justice Hilder, held that the primary question she was required to determine was whether the appointment by IMTC as deputy of IMAM as asset manager for PW’s funds gave rise to a conflict of interest. It is an established principle of law, restated by the House of Lords in Boardman v Phipps (1967), that the relevant question to ask is whether ‘the reasonable man’ (a common benchmark in legal tests), looking at the relevant facts and circumstances of the particular case, would think that there was a “real sensible possibility” of conflict (known as the ‘conflict of interest rule’).
If the conflict of interest rule applies, the next questions to determine were: has the conflict been effectively ratified on behalf of PW and, if not, should the Court should authorise the appointment of IMAM with retrospective effect?
Applying the relevant tests
Was there a “real sensible possibility” of conflict?
There is no direct English authority on the question whether the engagement by a fiduciary of a related investment company presented a “real sensible possibility” of conflict. IMTC as the applicant before the Court of Protection accepted that there was a “theoretical potential” of conflict but argued that there was no real sensible possibility because it had adopted procedures which eliminated that potential.
In support of this argument, IMTC cited two foreign (and therefore non-binding) cases in which no conflict of interest was found to exist: Jones v AMP Perpetual Trustee Company NZ Ltd (1994) (New Zealand) and HSBC (HK) Ltd v Secretary of State for Justice (2001) (Hong Kong). The relevant facts and conclusions of these cases are succinctly summarised in the judgment. However, HHJ Hilder respectfully considered the court’s reasoning in neither case to be persuasive.
In the New Zealand case, for example, the court held that there was no conflict of interest where a corporate trustee had invested in an insurance contract arranged by its parent company (where fees were being paid to that parent company). Looking at the key factors of that case, HHJ Hilder said that they would not mean there was no real sensible possibility of conflict on English authorities. Although it was a key factor in the New Zealand case that the insurance company was a preeminent one with a comparatively attractive investment record (and so the trustee could still serve the best interests of the trust in selecting them), HHJ Hilder determined that neither the pre-eminence nor success of the linked business could be considered any guarantor of unconflicted motivation in the fiduciary as a matter of English law. In fact, it might actually encourage complacency.
Turning to the facts of the present case, HHJ Hilder detailed the process adopted by IMTC in a situation like PW’s:
- IMTC maintains a panel of investment advisers for deputyship situations, overseen by a committee – all companies on the panel have specialist teams dealing either exclusively or largely with Court of Protection clients;
- in any given case, IMTC then selects three or four firms on the panel to take part in a “beauty parade” (where they effectively pitch for the work);
- where the protected party has family members who are available to take part, IMTC seeks their views about including IMAM in the beauty parade;
- if the family object to IMAM being included then it will not be “without any attempt to persuade them” (but if they do not, then IMAM will usually be included but the connection to IMTC would be explained);
- IMTC then takes a “best interests” decision having regard to the factors in section 4 of the Mental Capacity Act 2005, including the views of the family; and
- the performance of the portfolio and investment managers is continually reviewed.
In PW’s case, her husband was told of IMAM’s connection to IMTC and he did not object to IMAM being included in the beauty parade.
From February 2023 onwards (pending the outcome of this case and following new guidance from the Office of the Public Guardian), IMAM has not been included in any beauty parades regardless of whether a family member is available to offer their views.
Was there an actual conflict?
HHJ Hilder’s conclusion on the question of an existence of a conflict was summarised in two steps: (1) the decision to appoint IMAM was made by IMTC in its fiduciary role and (2) IMTC is financially better off if IMAM is appointed. She said: “[at] a most basic level, those two concessions amount to recognition of the existence of a conflict of interest: one plus one makes two”. There was a “very clear, not remotely fanciful actual conflict of interest in IMTC appointing IMAM to manage PW’s funds.”
HHJ Hilder did not agree that the procedures Irwin Mitchell had put in place could, or did, extinguish the actual conflict because they did not remove the financial benefit to IMTC if IMAM were to be appointed. HHJ Hilder commented that such procedures (including the way they used scorecards as part of the beauty parade process) were vulnerable to biases, subjective interpretation, and human error. She also noted that IMAM would better know what boxes it needs to tick as part of the process, giving it an advantage over its competitors.
As for the views of the family, HHJ Hilder commented that many family members would have no experience in managing the kind of sums involved in these types of cases and are already in a position of trust towards the firm generally. Moreover, a family member not objecting to the inclusion of IMAM on the panel should not be treated as conferring some sort of ratification. The family member is not the principal in the fiduciary relationship and cannot provide that ratification – only the Court of Protection can do so where the principal lacks capacity to do so themselves.
IMTC raised the argument that excluding IMAM from consideration would be contrary to PW’s best interests because of the limited size of the field of potential investment managers. But HHJ Hilder disagreed – even though the pool of specialist firms is small, there were at least 9 other companies on the panel who could take IMAM’s place in the beauty parade.
HHJ Hilder also considered statements of three other highly experienced professional deputies, none of whom supported the use of instructing a related investment manager in this way.
Overall, HHJ Hilder concluded that a way to remove the conflict altogether would be for IMTC to waive any fees otherwise due to IMAM where IMTC was the instructing deputy. She recognised that Irwin Mitchell would be unlikely to adopt this model given that it lacked commercial and practical sense for them but said that, without removing the financial benefit, the processes did not get to the heart of the conflict of interest.
Has the appointment been ratified already?
A separate line of argument made by IMTC was that both the Court of Protection and the Public Guardian were already satisfied that the theoretical potential conflict could be appropriately managed and therefore IMAM could in theory be instructed by IMTC. There had been a previous case in 2015 (Re MWS) in which Irwin Mitchell LLP acted for MWS following his successful personal injury claim. IMTC was appointed as a property and financial affairs deputy for MWS and there was no family member or other closely related third party to offer their views on appointing IMAM to manage his affairs.
IMTC applied to the Court of Protection for authority to instruct IMAM as the independent financial adviser as well as for an order giving general authority to adopt the same procedure where IMTC or named Irwin Mitchell LLP partners are appointed as deputy and there is no family input. The Public Guardian was joined as a party and agreed to the specific appointment but opposed any general authority.
In Re MWS, the Court of Protection was prepared to allow IMTC to instruct IMAM provided they are satisfied it is in MWS’s best interests and there are effective safeguards in place to prevent abuse. However, as for the general appointment question, the Judge said that in all other cases IMTC has three options:
- the Law Society can work with the Public Guardian to agree a protocol for such scenarios within 6 months from the judgment (with IMTC’s input) – but if not possible then:
- IMTC can follow the SRA’s guidance and recuse itself, which would be the best course of option; or
- alternatively, it can let the Court of Protection manage the conflicts and apply for approval in every scenario (a costly option).
Irwin Mitchell subsequently contacted the Judge in that case to confirm that the order and supporting judgment was intended to relate only to where there is no family or relevant third party involvement, which the Judge confirmed. As a result of this, Irwin Mitchell said it had understood that it could include IMAM in beauty parades if there were such family members or other relevant individuals who could express their views.
In reaching a conclusion in the current case, HHJ Hilder found that there was nothing in the email exchanges following the Re MWS case that could reasonably be construed as any kind of ‘authorisation’ or ‘ratification’ of a general process in any other circumstances. Further, none of the other parties were involved in the exchanges and accordingly the informal exchanges could not give rise to any binding determinations.
Additionally, Irwin Mitchell had not implemented any of the options suggested by the Judge. It had only sought retrospective approval in the current case because it had been directed to do so by the Court.
The Public Guardian’s position had not always been clear (and it had not raised an issue with Irwin Mitchell during audit visits) but by the time the case came to trial it was aligned with that of the Official Solicitor, i.e. court authorisation was required in every case. In any case, HHJ Hilder stated that the non-intervention by the Public Guardian was insufficient to ratify or override the underlying conflict.
Should there be ratification now?
The final question for HHJ Hilder to consider was whether the Court should ratify the conflict now. However, she concluded that there was not sufficient evidence before her to do so and invited the parties to agree further directions. The point is therefore left open for another date, should Irwin Mitchell wish to retain the appointment of both IMTC and IMAM in PW’s case.
Conclusion
Unsurprisingly a flurry of legal commentary has followed from this case and it has encouraged law firms taking on fiduciary roles to reflect on whether their own structures satisfactorily deal with possible conflicts of interest. HHJ Hilder noted the “general interest” in the judgment and no doubt that interest will follow any developments in the case.
