Cayman Islands: When Must A Trustee Apply To Remove A Protector Or When Must A Trustee Bite The Hand That Feeds It?

Last Updated: 2 November 2009
Article by Nicholas Holland

The Issue

Very recently, the Jersey Royal Court stated that in certain very limited circumstances, including those before the court in that instance, a trustee has a duty to apply to court for the removal of a protector of the trust. It is difficult to conceive of any more awkward obligation to place on a trustee. My view is that in the Cayman Islands such an obligation will only arise under a traditional protector trust in very exceptional circumstances where the protector's conflict and conduct are egregious and the beneficiaries are minors or otherwise incompetent. However, I am also of the view that eventually such an obligation will certainly arise and arise much more often in the context of a Cayman STAR trust.

The Enforcer or Protector

By way of brief introduction to the topic, the notion of an "enforcer" or "protector" for a trust is now a commonplace figure in the offshore variants of the trusts world, though the position has received relatively little judicial acceptance onshore. The "protector" was first introduced in legislation in Bermuda under its Trusts (Special Provisions) Act 1989 as a part of an effort to expand the variety of valid non-charitable purpose trusts. The "protector" was the party with the power to enforce the trust. The statutory powers of the "protector" or "enforcer" is different in each offshore jurisdiction but they generally include the power to dismiss, replace or add trustees, the power to veto distributions of capital and veto trustees' decisions to add or remove beneficiaries.

The purpose of the role of the "protector" or "enforcer" has expanded from simply facilitating the expansion of the non-charitable purpose trust to permit the settlor to provide additional checks and balances by either making himself or a trusted friend the "protector" or "enforcer". This was essential to the success of the offshore trust product because many jurisdictions including Cayman require (in the context of certain kinds of trust at least) that at least one of the trustees be a trust company licensed in the offshore jurisdiction and this trustee would be a complete stranger in a foreign land (which location was usually itself an exotic small island or archipelago) as far as the settlor was concerned.

Given the success of the offshore trust, it was sadly inevitable that eventually the "strange" trust company on an exotic island (regulated as these companies generally are) would prove far more reliable than the trusted friend of the settlor.

Representation of Centre Trustees

The facts in Representation of Centre Trustees (CI) Limited [2009] JRC 109 are unusual and the protector's behaviour was particularly egregious. The protector of the VR Trust was a business partner of the prematurely deceased settlor and also the appointer of the VR trust with power to appoint new or additional trustees and new protectors. The protector was also the settlor of a parallel trust, the Africa Trust. The Africa Trust and the VR Trust each owned 50% of Terret Holdings Limited.

Terret Holdings Limited, at the behest of the protector of the VR Trust, distributed the proceeds of the sale some of its assets dramatically unevenly between the two trusts heavily favouring the Africa Trust at the expense of the VR Trust. The protector of VR Trust offered to buy the assets of the VR Trust for the nominal sum of $1 when the assets were valued by Ernst & Young at over $5 million. The protector of the VR Trust claimed entitlement and demanded payment of large sums from the VR Trust assets on behalf of various other entities which was refused by the trustee. The Protector of the VR Trust then appointed an additional trustee, Langtry Trust Company (Channel Islands) Limited, for the purposes of re-evaluating the Protector's claims to payment of the trust assets.

The last move, the appointment of the new trustee quickly backfired as they sided with the existing trustee's position. The trustees applied for the removal of the protector. The Protector remained in office right up until the hearing of the application for his removal. Most importantly, the trust deed provided that the power to appoint a protector lay with the appointer or failing the appointer in the trustees.

Three Obligations When a Protector is in Conflict with the Trust

The Court set out three principal obligations arising from a protector with a conflict of interest (two of which were on the protector himself and one of which was on the trustee).

  1. The protector is obliged to disclose the conflicting interest to the trustee and in the case of a fixed trust to the beneficiaries or in the case of a discretionary trust to the principal beneficiaries if practicable.
  2. The protector is also required to resign unless (1) it is in the interests of the beneficiaries for him to remain and (2) he reasonably and honestly believes that he can discharge his duties in the interests of the beneficiaries.
  3. The trustee has a "duty" to apply for the protector's removal where the protector has failed to comply with the protector's obligation in B.

It is the last obligation on the trustee that is so tricky. Certainly, the trustees in this instance did a very brave and right thing and they could not reasonably be criticized for bringing the application for the removal of the protector but a "duty" to do so is another matter. Why place this obligation on the trustee? The protector will typically have the power to replace the trustee and so the trustee is to some extent beholden to the protector. The beneficiaries would have authority to bring such an application and this instance were all of age.

Where Angels Fear to Tread

Perhaps the Court understandably wished to immunize the trustees (both Centre and Langtry) from complaint or criticism, and retroactively placing a duty on the trustees to behave as they had done would certainly ensure that no commercial harm came to them. The decision purports to level the trustees' playing field at the high threshold of these trustees' very laudable conduct.

However, creating an obligation on the trustees to behave with such courage may go too far. The protector is there to monitor the trustee not vice versa. The trustees had done their job to date and had successfully prevented every predatory effort by the protector against the trust property. This profoundly conflicted protector caused the trustees grief and great inconvenience and his removal was of benefit to the beneficiaries but was there actually an equitable obligation on the part of the trustees to apply to have the protector removed in the face of inaction by the beneficiaries? Are the beneficiaries truly entitled to sit back, watch this sort of predatory conduct on behalf of the protector, wait for the trustee to commence proceedings and, if the trustee fails to do so, the beneficiaries can then sue the trustee for breach of trust?

Had the trustees informed the beneficiaries of the protector's damaging behaviour and done nothing more, would that not be enough? One of the trustees' concerns in the Centre Trustees' matter was that the protector was interfering with their communications with the beneficiaries and that they were essentially being prevented from clearly communicating their concerns. If the trustees were able to communicate clearly with the beneficiaries then simply communicating their concerns may have fulfilled their fiduciary obligations. However, the decision cannot be isolated on this ground because the Court dismissed this allegation as unproven and proceeded on the ground that the beneficiaries simply had no interest in hearing anything from the trustees.

The Jersey Royal Court clearly answered, albeit in obiter dicta, that it was not enough for the trustees simply to do their utmost to inform the beneficiaries of their concerns. Was it right to do so? This very much reminds me of the Chief Justice of Australia's purported statement regarding recent developments in equity in Canada: "There are three kinds of Canadians: Canadians who owe fiduciary duties, Canadians to whom fiduciary duties are owed and Canadian judges creating new fiduciary duties every day." That is obviously good humoured criticism but it is criticism none the less. Criticism which correctly underlines that fiduciary obligations are rather like bonsai trees, their responsible growth requires frequent pruning.

On the one hand, an obligation to take steps to remove the protector may be implicit in the trust deed's grant to the trustee of the right to appoint a replacement protector where there is no protector fit and capable to perform the role. However, I cannot make this suggestion without pointing out that it seriously strains the language in most trust deeds (including the one in issue in Centre Trustees) likely past the breaking point. Generally, the grant is quite clearly intended to permit the Trustee to fill a vacancy rather than replace an existing protector.

On the other hand, the protector's role is to protect the interests of the beneficiaries from the unwanted actions of the trustees. If adult, competent beneficiaries have been informed of the trustees' concerns is it not misplaced to put an obligation on the trustees to go further and seek to have the protector removed?

Conclusion - A Traditional Protector Trust in Cayman

My own view is that Royal Court's finding that the trustees were under a duty to seek the removal of the protector turns on the case's extraordinarily egregious facts and the Court's desire to protect the trustees from any negative commercial impact from their obviously correct, morally upstanding and brave decision to take the steps they did. However, when the issue is plainly before the Court (rather than a matter of obiter dicta) and the trustees have informed adult, competent beneficiaries of their concerns regarding the protector but the trustees have not applied for the removal of the protector, the Courts will likely find that no such duty exists either under the Trust Deed or generally at equity. Only time and ultimately the Courts will tell if I am right. In the meantime however, trustees would do well to be on the look out and seek legal advice on any conflict of interest between the protector and the interests of the trust.

Obviously, where the beneficiaries are minors or otherwise incompetent, this changes things markedly. Here, in these limited circumstances, the trustees, even of an ordinary trust, will find that the obligations raised by the Centre Trustees decision will find fertile ground in Cayman.

Conclusion - A Star Trust

When the issue arises in the context of a Cayman Special Trusts – Alternative Regime trust ("STAR trust"), the institutional competence of the various interested parties changes markedly and this will affect the trustee's obligation to apply to remove the enforcer. In the STAR trust regime, only the trustee has standing to appoint an enforcer and certainly no beneficiary has such standing. The only one competent to challenge the enforcer is the trustee and so he presumably must rise to the occasion.

Indeed under the Cayman Islands Trusts Law (2007 Revision) the trustee is clearly granted the power and the obligation to apply to court for the appointment of an enforcer. Section 100(4) provides that: "(b) if an enforcer with a duty to enforce is unable, unwilling or unfit to do so" or "(c) if there is no enforcer who is of full capacity and who – (i) is a beneficiary; or (ii) has a duty to enforce and is fit and willing to do so" and with respect to subsection (c) it is an offence for the trustee not to do so. Under section 101 (2) "Subject to evidence of a contrary intention, an enforcer is deemed to have a fiduciary duty to act responsibly with a view to the proper execution of the trust" and (3) "A trustee or another enforcer, or any person expressly authorised by the terms of the special trust has standing to bring an action for the enforcement of the duty, if any, of an enforcer."

In some ways, this brings to the forefront one of the central objections to the STAR trust regime. If the beneficiaries have no standing to enforce any rights against the trustees or enforcers, is there really a trust at all? It is true that an unenforceable right is not a right at all and that an obligation which cannot be enforced is nothing more (or less!) than a moral obligation and not a legal or equitable obligation. It is also true that the idea of a third party protecting or enforcing our legal or equitable rights rather than the possessor of the right may at first blush seem counterintuitive. However, looks can be deceiving. This notion is commonplace in our law. Parents, guardians and attorneys fulfill this role throughout the common law world.

What is troublesome in this context though is that there is no need for an object, or no need for a certain object at any rate, for a Cayman STAR trust. There is only the enforcer and his or her requirements. Arguably, it is impossible for the enforcer under a Cayman STAR trust to be in a conflict as there is no trust object with which his or her interests might conflict.

However, this all sounds remarkably academic and a little too neat. If the enforcer's actions were clearly conflicted with the trust "objects" and the enforcer was pillaging the trust assets for their own benefit, a subsequent enforcer might well look to the trustees for compensation for the trust for doing nothing but blindly obeying the will of the prior enforcer. This is a risk that all trustees would do well to bear in mind.

When must the trustee act and apply to remove the enforcer? Commercially, the trustee will be very reluctant to do so, as amongst other things the enforcers have the power of appointment and replacement of the trustees. However, as the trustee is the only party with the standing to remove a predatory enforcer, it is here that the Royal Court's view will no doubt be incorporated into Cayman law when the case arises. The trustee cannot merely advise the beneficiaries that the enforcer is in a conflict with the trust but it must act.

If the trustee has any doubts regarding whether the enforcer is conflicted with the trust, it would do very well to seek legal advice on the matter promptly. Taking solace in the solipsistic argument that the enforcer can do no wrong may well come to haunt the naïve trustee.

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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