A number of recent Grand Court decisions have demonstrated that the Cayman Islands Court remains at the forefront of developments in trusts and trust litigation. Three notable cases address subjects as varied as protector's powers, the validity of no contest clauses and the circumstances in which the Court will refuse to entertain a claim on the ground that it amounts indirect tax gathering on behalf of a foreign revenue authority.
The 2006 decision, In the matter of the Circle Trust, HSBC International Trustee Limited v Wong and Five Others 1arose out of an acrimonious dispute between beneficiaries of a trust relating to the control and running of a paper manufacturing business established in China and Hong Kong. The Plaintiff Trustee applied to the Court for the preliminary determination of various questions, including issues relating to the nature of the Protector's duties. In an effort to assert control over the dispute, the majority beneficiaries of the Trust, who comprised the wife of the founder of the business and two of his children, appointed the founder as the Protector pursuant to a clause in the trust deed allowing a majority of the sui juris beneficiaries to appoint an additional Protector in circumstances where an Original Protector had not been appointed. The two remaining beneficiaries argued that the appointment of their father as Protector was invalid having been carried out irrationally and in the absence of good faith. By way of preliminary issue the Court considered whether under the terms of the trust deed the majority beneficiaries had the power to appoint the Protector and if so, whether that appointment had been invalid or irrational. The Court held that the majority of the sui juris beneficiaries had power to appoint a Protector on the face of the deed and that as the power was a fiduciary power, therefore the beneficiaries were obliged to exercise such power in good faith. The rationale for this finding was that as the power to appoint trustees would normally be fiduciary, similarly the power to appoint a Protector who could in turn appoint trustees would not be treated any differently. It was held that the power to appoint a Protector in the circumstances of the case was a fiduciary power. The Court then went on to consider the exercise by the Protector of the power to appoint and remove trustees. In this context it was held that the Protector held a fiduciary position and his power to appoint or remove trustees was subject to the review and scrutiny of the Court. The Protector could exercise his powers only for the good of the beneficiaries as a whole. Interestingly, the Court emphasised in its judgment that it has an inherent jurisdiction to remove the Protector and appoint another in his place if the Protector fails to exercise his powers in the best interests of the beneficiaries.
In A.N v Barclays Private Bank and Trust (Cayman) Limited2 the Grand Court considered the validity of forfeiture clauses, otherwise known as "no contest" clauses. The Plaintiff was the discretionary beneficiary of two trusts and sought a declaration that a forfeiture clause in each of the trusts was invalid, as well as the removal of the trustee and the Protective Committee. Clause 23 of the trusts was a forfeiture clause stating that beneficiaries contesting the validity of the Trust, transfers of property or decisions of the Trustee or Protective Committee would be excluded from any benefit, direct or indirect. The Plaintiff alleged that the Trustees and the Protective Committee had acted unreasonably in seeking to restructure the underlying business owned by the Trust. The Plaintiff had sought and obtained an ex-parte injunction preventing the IPO of the underlying company: a valuable research, trading and manufacturing business. The question whether the action initiated by the Plaintiff breached clause 23 and therefore as a consequence she was no longer a beneficiary came before the Court. The Court also considered whether it was able to grant the Plaintiff relief from forfeiture. The Chief Justice held that the forfeiture clause was valid and not unconscionable in the circumstances of this particular case. Specifically, the Chief Justice decided that the clause should be construed as including the word "unjustifiably" so that it read:
"Whomsoever unjustifiably contests the validity of this deed and the Trust created under it, ... shall cease to be a beneficiary of any of these trusts and shall be excluded from any benefit direct or indirect deriving from the trust fund".
A justifiable contest was held to be a bona fide contest, one with "probabilis causa litigandi", and one which was not frivolous or vexatious. Interpreted literally, clause 23 would be too uncertain to be valid, however with the addition of the word "unjustifiably", it was held that the beneficiary would know with much greater certainty the exact action which would bring about the forfeiture of her interest. The Court held that the forfeiture clause was equivalent to a condition subsequent and therefore the Court could intervene in equity to grant relief from forfeiture if the Plaintiff had not complied with the terms of the clause through no fault of her own. Perhaps the major significance of this decision is that it is to our knowledge the only reported decision anywhere concerning the validity of no contest clauses in trusts.
The as yet unreported 2007 decision in Even Wahr-Hansen and Others v Compass Trust Co. Limited and Others3 is the latest Court decision in the continuing litigation relating to the Estate of the late Norwegian shipping magnet Anders Jahre who died in 1982. In this fresh action commenced by the Plaintiff administrator of the Jahre Estate, which was taken under public administration in Norway, the Court was asked to rule by way of a preliminary issue on the validity of Defendants' assertion that the Estate's claims against them were an indirect attempt to enforce the revenue claims of a foreign authority and therefore unenforceable. The dispute between the parties on this issue centered on the nature and scope of the prohibition on indirect enforcement of a tax gathering claim. In a detailed judgment, Mr Justice Henderson reviewed the existing Commonwealth authorities relating to the question of tax gathering. To summarise, the Judge agreed that there had to be an unsatisfied tax claim on behalf of the State of Norway and also agreed in order for the defence to succeed it should be shown that most of the proceeds of litigation would go to the State of Norway. A further issue between the parties was whether the claim was "in substance" an attempt to collect foreign tax. It was not necessary to prove a "connection" between the present claim and foreign tax law and it was not necessary that the defence of indirect tax gathering only be available to the tax payer himself as opposed to another party. On the facts of this case it was held that in substance the Estate had no other creditor other than the Norwegian Revenue. There was one tiny debt owed to the Ministry of Justice which comprised a fraction of one percent of the revenue debt. The burden to show the claim was in substance an attempt to collect foreign tax rested on the Defendants and the issue turned on the nature of the public administration of an Estate in Norway where the Administrator is supported by the Judge of the Probate Court and reports to him. It was accepted by the Court that the Administrator had worked closely with the Ministry of Finance and paid a great deal of attention to its wishes and views. It was also accepted that Mr Wahr-Hansen had worked "hand in glove" with and on behalf of the Norwegian authorities and the Probate Court had exercised a significant degree of control and supervision, so much so that the Judge held that "the [Norwegian] Court was exceeding the level of supervision ordinarily exercised over a Court appointed liquidator, particularly where the liquidation estate has only one major creditor". Nevertheless, the Estate was currently self-funding, having settled actions against various other parties. Ultimately the Judge decided that there were sufficient actual distinctions between the facts of the case and the main reported authorities. In particular the Probate Court had a relatively high involvement in the administration of the Estate and acted against the wishes of the Norwegian Revenue on a few occasions. Judge Henderson decided that this distinction was of a controlling importance and concluded the claim was not in substance an attempt to collect tax. Although the tax gathering defence was not upheld on this occasion, the decision is significant as it amounts to a recent upholding of the principles behind tax gathering jurisprudence set out in cases such as Peter Buchanan v McVey  IR 89 and Government of India v Taylor  A.C. 491, as well as comprising a useful and detailed review of all other authorities on this subject.
1 In the matter of the Circle Trust, HSBC International Trustee Limited v Wong and Five Others Grand Court, Henderson J, July 28 2006 [2006 CILR 323]
2 A.N. v Barclays Private Bank and Trust (Cayman) Limited and Six Others, Grand Court, Smellie C.J., July 17 2006 [2006 CILR 367]
3 Even Wahr-Hansen v Compass Trust Co. Limited, Grand Court of the Cayman Islands, Henderson J., January 8 2007
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.