Trustee indemnities and exclusion clauses: whether and when to
indemnify a trust protector facing the claim in role of
A trust protector is not a statutory role but one created by the documents creating the trust, and these set out the role the protector is to play in the running of the trust and his powers. The principle is that the protector oversees the management of the trust and ensures that the settlor's wishes are adhered to. The powers are often extensive, including the removal and appointment of trustees, moving the administrative jurisdiction of the trust, alterations to classes that may benefit under discretionary trusts and the distribution of assets to beneficiaries. Frequently the trust protector is a professional advisor to the settlor. This was the case in a recent application for directions in the Isle of Man Court, which was asked to look at the issue of paying a trust protector's costs in defending proceedings brought by the SEC in relation to his conduct over a decade ago as protector of several Manx funds. Whilst the guidance given is not binding, the Manx Court's reasoned approach would be persuasive in Cayman trusts context.
The factual background is that the SEC alleges in a civil claim that several trusts were used in a fraudulent scheme to hold and trade tens of millions of dollars of securities in US public companies without disclosing their ownership and their trading of those securities. The trusts were allegedly controlled by the settlors through the appointment of protectors, only one of which is accused of aiding and abetting the allegedly fraudulent scheme. The protector asked the trust to indemnify him for his costs in defending those allegations. The current trustees applied to the court for guidance on the key issues of whether and when any payment should be made: (i) was there power to do so under the provisions of the trust, and (ii) should they wait until the result of the proceedings were known before advancing costs? Whilst the trustees did not accept the allegations made by the SEC, indemnities for some of the trusts in question were discretionary and others which were not excluded liability where there had been "willful and individual fraud or dishonesty".
The Isle of Man Deemster gave guidance that it was appropriate
for the trustees to wait until the result of the SEC proceedings -
"the principle that where reasonably well founded
allegations of personal fraud are made against a trustee a decision
as to whether the trustee should be indemnified out of trust funds
should properly await the outcome of the
proceedings." Further "until the outcome
of the SEC complaint is known, the Trustees cannot determine
whether there has been any "disqualifying wrongdoing" by
the trustee such that he is disentitled to an indemnity".
He also pointed out that other factors needed to be considered such
as the effect of the agreement or deed of release entered into when
the trustee ceased to be a protector and the nature of any other
funding available to him.
The indemnity of the protector arose out of provisions in the trust deeds and so the Court was not called upon to consider if a protector would have a right of indemnity absent such provisions. In construing the provisions the Court applied the case law and principles applicable to trustee indemnity. In doing so they gave a useful review of the law on exclusions form the right of trustees to be indemnified concluding that such exclusions can be enforceable but clear language must be used.
The content of this article is intended to provide a general guide to the subject matter. Please contact Sophia Harris of Solomon Harris for specialist advice about your specific circumstances.