In recent times, trustees in the Crown Dependencies have sought the approval of the courts when faced with 'momentous' decisions such as the decision to sell property. For a trustee, the issue of whether a particular decision is 'momentous' is often clear, as is the need to apply to court for its blessing of that decision, but there might be many circumstances in which the situation is less than clear and there may be complicating factors. Karen Le Cras, a partner at the law firm of Carey Olsen in Guernsey, investigates with the help of counsel Richard Field and associate Paula Fry.
The Royal Court of Guernsey has given a very useful and succinct summary of the applicable law when a trustee is considering whether to ask the court to give its blessing to a 'momentous' decision. The court's anonymised judgment in the matter of the LKM Discretionary Trust, which was heard in camera, will be of great benefit to trustees and practitioners alike. The decision draws assistance from the most recent authorities in Guernsey, Jersey and England and Wales in order to set out a clear summary of the law in this area. It illustrates the applicable test and highlights the importance of careful and reasoned decision-making by trustees.
The facts of the case
In LKM, the trustee was asked to make a substantial distribution from trust assets to enable a beneficiary to satisfy the terms of a deferred prosecution agreement and a settlement agreement, both of which the beneficiary had negotiated with foreign authorities in order to resolve certain proceedings and investigations against him.
The LKM Discretionary Trust was established under Guernsey law as a conventional discretionary trust. The original class of beneficiaries included the beneficiary, the beneficiary's wife, their daughters and any other person added to the class. By a subsequent appointment, a sub-fund was created for the principal benefit of the beneficiary and the daughters (known as the 'Main Fund').
The terms of the trust conferred broad powers upon the trustee. These included the power to raise any assets out of the Main Fund and to apply them for the benefit of any Main Fund beneficiary. Moreover, the trustee was entitled to exercise its powers in an unfettered manner (save for its inherent fiduciary obligations) and could ignore entirely the interest of any other beneficiary of the Main Fund.
The assets of the Main Fund included cash and the share capital of companies that owned real estate (one of the properties was the family's main residence). Although the distribution did not represent most of the Main Fund's assets, it would, if paid, represent a significant part of the liquid assets, thereby affecting the liquidity of the Main Fund.
The request and the trustee's decision
The claims against the beneficiary involved alleged fraudulent misrepresentations and omissions in respect of certain investments, leading investors to claim damages against the beneficiary and others. Furthermore, the authorities in the relevant jurisdiction investigated and brought criminal proceedings against the beneficiary and others. As a consequence, the beneficiary was subject to an arrest warrant (which meant that he could not travel from the country where he was effectively confined) and faced costly and continuing litigation and defence costs. The deferred prosecution agreement and the settlement agreement were signed with a view to bringing those proceedings to an end, without the need for further costs.
The beneficiary therefore asked the trustee to make the distribution on the basis that the beneficiary did not have independent means to make the payment due under the deferred prosecution agreement.
One of the main features of a deferred prosecution agreement is that it allows the prosecuting body and the accused to reach an agreement so that the specified criminal proceedings are deferred, pending the satisfaction of the terms of the agreement. Conditions are imposed (such as the payment of a lump sum and a requirement for the accused not to be arrested or charged for a certain period) and as long as they are satisfied, the criminal proceedings are discontinued. If there is a breach of the conditions, the whole agreement frequently falls away and the criminal (and/or civil) proceedings will forge ahead.
The trustee in LKM therefore had to decide whether to make the distribution in those circumstances.
A particularly momentous decision
The trustee was completely satisfied that it had the requisite powers to make the distribution for the benefit of the beneficiary under the terms of the trust, but it recognised that its decision to proceed with the payment was one that might be considered as 'particularly momentous' in the circumstances.
As part of its deliberations, the trustee identified that real benefit could accrue not only to the beneficiary but also to the remaining beneficiaries of the trust. For instance, the trustee highlighted the direct benefit to the beneficiary of being permitted to travel, no longer facing never-ending litigation with its ensuing costs, and being able to resume a regular home-life.
The trustee also considered the collateral benefits to the family in that the daughters would be able to see their father more regularly and the family's domestic circumstances would be improved; there may be a return to the family home and better educational facilities for the offspring. Moreover, the trustee was mindful that the making of the distribution was likely to benefit the trust more widely, as it would enable the trustee to access funds to manage and maintain the real estate within the trust.
In contrast to the evident benefits of making the distribution, the trustee was wary about the distribution in that it represented a significant sum and a substantial proportion of the liquid assets of the Main Fund. It also had to consider the beneficiary's need to satisfy the terms of the deferred prosecution agreement. Accordingly, the trustee made a decision in principle to make the distribution, subject to an application to the court for its blessing in order to protect the trust from future claims.
The trustee's decision was set out in very full and considered minutes which charted the trustee's thought process in detail and the factors it took into consideration in reaching its decision. The court noted the detail provided by the trustee, which undoubtedly helped to persuade it that the Trustee had given the matter due consideration.
The judgment
The trustee's application fell squarely into 'category two' of the categories set out in Public Trustee v Cooper and the court averred that its jurisdiction to entertain such claims was well established.
The court was also satisfied that the trustee had not surrendered its discretion to the court and that the decision to make the distribution could be properly regarded as 'momentous.' When assessing the 'momentousness' of the decision, the court was referred to various authorities including Kan v HSBC International Trustee Limited [2015] JCA 109, a Jersey case in which Bompas JA referred to a momentous decision as being "a decision of real importance for the trust" and Re F [32/2013], a Guernsey case in which Martin JA effectively inverted the test and stated that if "...the court considers that the trustees' decision is of insufficient moment, it may refuse to entertain the application..."
However, in LKM, the court was careful not to prescribe a rigid set of requirements that would be necessary to illustrate that a decision was of sufficient moment. It underlined that all 'category two' applications are largely fact-sensitive.
The refusal of the court to set out any form of prescriptive formula is to be welcomed. Although some guidance can be elicited from the authorities in terms of the broad circumstances in which a trustee has ascribed the label 'momentous' to a decision, the context will be very different in each individual case.
After considering a number of Guernsey authorities (including the very recent case of A (as Trustee of the Trust) and R1, R2, R3, R4 and R5 [25/2016] in which the Royal Court approved the distribution of assets which was opposed by one beneficiary), the court set out the questions that it was required to answer before approving a momentous decision. These were as follows.
- Did the trustee have the power under the terms of the trust instrument, the instrument of appointment and the Trusts (Guernsey) Law 2007 to make the 'momentous decision' of making the distribution?
- Was the court satisfied that the trustee had formed the opinion to do so in good faith and did it believe that it desirable and proper for it to make the decision?
- Was the court satisfied that the opinion formed by the trustee was one that a reasonable trustee in its position, having been properly instructed and informed, could have arrive at?
- Was the court satisfied that the opinion arrived at by the trustee had not been vitiated by any actual or potential conflict of interests which either had or might have affected its decision?
Furthermore, in considering questions (b), (c) and (d) the court noted that it should exercise caution, it should not act as a rubber stamp, and it should not take a lax approach.
Taking each point of the test in turn, the court was satisfied of the following.
- The trustee had enough powers under the terms of the trust to make the distribution.
- Taking a cautious approach and being satisfied on the "thorough and extensive" factual evidence placed before it, the trustee had formed the opinion to make the distribution in good faith. It was, moreover, desirable and proper for it to make the decision to do so.
- After taking a cautious approach and being satisfied on the evidence, the opinion formed by the trustee was one that a reasonable trustee could have arrived at. The court was especially satisfied on the evidence that the present state of affairs was having a bad effect on the beneficiary's family and that a decision not to make the distribution could be ruinous for the trust's assets and the beneficiaries.
- There was no evidence that the decision of the trustee to make the distribution had been vitiated by any actual or potential conflict of interests which had or might have affected its decision.
Accordingly, the court decided to approve the trustee's decision to make the distribution.
When attention to detail pays off
LKM Discretionary Trust demonstrates that it is important for the trustee to put sufficient and detailed evidence before the court to demonstrate that it has considered the pertinent matters in detail and made evidence-based decisions.
Such a strategy helps to persuade the court to overcome any caution it may have and answer any questions that may arise, particularly as each case is determined on its own facts.
The importance of full and rational minutes of trustee meetings (or written resolutions made at the time that the relevant 'momentous decision' was made) cannot be over-emphasised. The trustee's decision and reasons for it should be documented comprehensively and clearly, in a manner that demonstrates that the trustee has noted the background, has set out its deliberations and has resolved to make the 'momentous' decision.
Furthermore, and depending on the circumstances of the case, the court may well take into account other relevant factors, such as the collateral benefit to the beneficiaries and the trust assets, the pecuniary position of the beneficiaries or any of them and the composition of the assets of the trust.
The judgment in LKM Discretionary Trust provides a welcome summary of the relevant law and some helpful guidance about how to approach such applications. It sheds light on the likely approach of the court when dealing with 'momentous' decisions. The Royal Court of Jersey would approach an equivalent application in much the same way. Although trustees will on occasion still ought to think carefully when deciding how to approach particular decisions, the guidance set out here will doubtless help them in that process. It is also a welcome reminder that the court will take a pragmatic approach when recognising the dilemmas that trustees face as they go about their day-to-day business.
An original version of this article was first published by Offshore Red, October 2016.
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