Guernsey: ‘Momentous' Decisions In Dividing Trust Assets

In a Q&A for LexisNexis, Karen Le Cras, Richard Field and Paula Fry examine the background to the matter of the LKM Discretionary Trust and its potential impact.

What is the background to the case?

The trustee of the LKM Discretionary Trust was asked to make a substantial distribution from trust assets to enable a beneficiary to satisfy the terms of a deferred prosecution agreement (DPA) and a settlement agreement. The beneficiary had negotiated these agreements with foreign authorities in order to resolve proceedings and investigations brought against him.

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. Further, the authorities in the relevant jurisdiction investigated and brought criminal proceedings against the beneficiary and others, which meant that the beneficiary was subject to an arrest warrant and faced costly on-going litigation and defence costs. The DPA and the settlement agreement were signed with a view to bringing those proceedings to an end, without the need for significant further costs being incurred.

The beneficiary asked the trustee to make the distribution on the basis that the beneficiary did not have independent means to satisfy the payment due under the DPA. 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 (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 fund.

The assets of the main fund included cash and the share capital of companies owning real estate (one of the properties was the family's main residence). While the distribution did not represent the majority of the overall assets of the main fund, it would, if paid, represent a significant part of the liquid assets, thereby affecting the liquidity of the main fund.

The trustee was satisfied that it had the requisite powers to make the distribution for the benefit of the beneficiary under the terms of the trust—however, the trustee 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 on-going litigation with its ensuing costs and resuming 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 on a more regular basis and the family's domestic circumstances would be improved. 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 considering whether to make the distribution, the trustee noted that the distribution 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 DPA. The trustee therefore made an in-principle decision 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 in detail the trustee's thought process and the factors it took into consideration in reaching its decision. The court noted the detail provided by the trustee, which undoubtedly assisted in terms of persuading the court that the trustee had given the matter due consideration.

What was the outcome?

The court was satisfied that the trustee's application fell squarely into 'category two' of the categories set out in Public Trustee v Cooper [1999] All ER (D) 1524 and 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 'momentous' nature of the decision, the court was referred to various authorities including Kan v HSBC International Trustee Limited [2015] JCA 109 (registration required), a Jersey case in which Bompas JA referred to a momentous decision as being 'a decision of real importance for the trust' and the Re F Guernsey judgment 32/2013 (registration required), 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'.

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 Guernsey Judgment 25/2016 (registration required) in which the Royal Court approved the distribution of assets which was opposed by one beneficiary), the court set out the applicable test that it was required to address before approving a momentous decision:

  1. 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?
  2. Was the court satisfied that the trustee had formed the opinion to do so in good faith and that it was desirable and proper for it to make the decision?
  3. Was the court satisfied that the opinion formed by the trustee was one which a reasonable trustee in its position properly instructed and informed could have arrive at?
  4. 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?

In considering questions 2, 3 and 4 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 that:

  • the trustee had sufficient 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 and that it was 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 which a reasonable trustee could have arrived at—the court was especially satisfied on the evidence that the present state of affairs was having an adverse impact on the family of the beneficiary and that not making the distribution could have a potentially ruinous impact on the trust 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.

Why is it important?

The court considered and helpfully summarised the most recent authorities from Guernsey, Jersey and England and Wales, making LKM Trust the most recent exposition of the law in this area.

The case gives clarity as to the approach to be taken by trustees and guidance as to the factors that trustees should consider when considering making an application to court for the blessing of a 'momentous' decision. It also sets out the scope of the court's role and its powers and is a useful reminder of the fact that the court will not substitute its own view for that of the trustee.

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. While 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.

What implications does this have for trustees?

It is important that trustees put sufficient and detailed evidence before the court to demonstrate that they have considered the pertinent matters in detail and made evidence-based decisions.

The importance of full and rational minutes of trustee meetings (or written resolutions made at the time the relevant momentous decision was made) cannot be overemphasised. The trustee's decision and reasons for it should be documented comprehensively and clearly, in a manner which 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 trustee should therefore give consideration to such factors in its own deliberations.

Is there anything else that practitioners can take from this?

The judgment provides a welcome summary of the relevant law, helpful guidance as to how to approach such applications and sheds light on the likely approach of the court when dealing with 'momentous' decisions. While trustees will on occasion still need to think carefully as to how to approach particular decisions, the guidance set out here will doubtless assist 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 in their daily role.

To read our full briefing note on this judgment, please click here.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
17 Oct 2018, Other, St Peter Port, Guernsey

To showcase and celebrate the best of tech whilst providing networking, learning, business and social opportunities, Digital Jersey is once again hosting Jersey TechWeek.

24 Oct 2018, Conference, St Peter Port, Guernsey

The Fund Finance Association is a non-profit industry association in the fund finance market that aims to educate members, legislators, regulators and other constituencies about the fund finance market.

13 Nov 2018, Conference, St Peter Port, Guernsey

SuperInvestor is part of the SuperReturn Series - the world's leading private equity events.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions