Cayman Islands: Representation Of Centre Trustees [2009] JRC 109

Protector's Conflict of Interests Facts

Mr Pabst and Mr Van Rooyen entered into a joint venture to develop mines in South Africa through a company known as Terret Limited (the "Company"), of which Mr Pabst was a director. The Company was owned 50% by the trustee of the VR Family Trust, settled by Mr Van Rooyen for his family, and 50% by the trustee of the Africa Trust, settled by Mr Pabst.

Centre Trustees (C.I.) Limited ("Centre") was the trustee of the VR Family Trust. Mr Pabst was Protector and Appointor of the VR Family Trust. Mr Van Rooyen was later killed in a helicopter accident, leaving minor beneficiaries of the VR Family Trust. Centre became concerned that the Africa Trust was receiving greater benefits out of the Company than the VR Family Trust. Mr Pabst also offered to purchase the VR Family Trust's share in the Company at a substantial undervalue and he was also involved in the sending of letters demanding repayment of certain loans from the Company and the VR Family Trust, of which Centre was either unaware or had believed to be shareholder distributions.

In 2007, Mr Pabst used his powers under the VR Family Trust to appoint Langtry Trust Company (Channel Islands) Limited ("Langtry") as co-trustee with Centre (together, the "Co-Trustees"). This appointment was made without prior notice to Centre, and Centre were concerned that this was an attempt by Mr Pabst to strengthen his position with regards to the claims against the VR Family Trust. At this stage, Mr Pabst's lawyer provided a statement of the claims against the VR Family Trust which had been previously set out in the letters referred to above. These claims were rejected by both of the Co-Trustees.

Centre was concerned that Mr Pabst was preventing proper communication between the beneficiaries of the VR Family Trust and the trustees of that Trust, that he was exercising his powers for his own benefit and that he had a conflict of interests. The Co-Trustees made an application to Court seeking the removal of Mr Pabst from his positions as Protector and Appointor of the VR Family Trust.

Decision

Once an application to the Court had been made by the Co-Trustees for Mr Pabst's removal, Mr Pabst did not oppose such removal from either office. However, the Court was critical of Mr Pabst's failure to resign from both offices in a timely manner and accordingly, awarded costs against him.

It was accepted that Mr Pabst's powers under the VR Family Trust must be exercised in good faith and were not beneficial powers that could be exercised in the interests of Mr Pabst. The Court explained that the clause in the trust instrument which provided that no power vested in the Protector was a fiduciary power, merely had the effect of removing Mr Pabst's obligation to consider the exercise of such powers. It did not have the affect of removing the overriding obligation on the Protector that such power be exercised for the benefit of one or more of the beneficiaries in the event that the power is exercised at all. The Court agreed that just as beneficiaries are entitled to require that decisions taken by their trustees are made with no regard to any private interests or competing duty, so the beneficiaries are entitled to require and expect the same from a Protector or Appointor.

When faced with a conflict of interest, the Court, in summary, provided the following guidance in managing such a conflict:

1 the Protector must disclose the conflict to either the trustee and/or the beneficiaries;

2 how the conflict is managed will depend on the powers that the Protector has. The Court held that in certain instances the Protector may be able to remain in office if to do so would be in the best interests of the beneficiaries provided he honestly and reasonably believes that he can discharge his duties in their interests. If the Protector chooses to continue in his office, despite a conflict, he must be able to justify any decisions or actions taken; and

3 if the Protector cannot manage the conflict sufficiently, the Court stated that his duty is to resign. Failure to do so will result in the trustee having a duty to apply to the Court for the Protector's removal.

In this instance, the Court held that the conflict of interest was pervasive and it could not envisage any circumstances in which Mr Pabst could reasonably contemplate remaining in office. It was held that Mr Pabst had a duty to resign from the moment it was contemplated that claims in which he had an interest would be advanced against the VR Family Trust. As he had failed to do so, certain cost orders were made against Mr Pabst.

Comment

This case clearly demonstrates the high standards expected of Protectors when facing a conflict of interest and that there is a positive duty to actively manage this. It is clear that in many cases a conflict of interest will require the Protector to resign.

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.

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