Originally published in Private Client Practitioner, Guernsey supplement, November 2008
Trustees always need to keep an eye on the latest court cases that may effect them. Here Ogier take a look at a two recent Guernsey cases and the implications for trustees of Guernsey trusts.
Two cases decided in the past year by the Royal Court of Guernsey (the Royal Court), namely In re the H Trust (Royal Court, 29 August 2007) (Judgment 28/2007) and the In re the M Trust (Royal Court, 20 March 2008) (unreported) are worth considering for their implications for the trustees of Guernsey proper law trusts.
In re the H Trust 29 August 2007
The judgment of the Royal Court sets out the principles that the Royal Court will adopt when considering an application to approve the proposed variation of a Guernsey trust under the Royal Court's statutory power in section 52 of the repealed Trusts (Guernsey) Law, 1989 (the 1989 Law). (We note that section 52 has been replaced by the equivalent section 57 under the Trusts (Guernsey) Law, 2007 (the 2007 Law) which came into force on 17 March 2008.)
The settlor established the H Trust primarily to benefit his two children, an adult son (aged 19) and a minor daughter (aged 17). Under the original terms of the H Trust, the trustee had the discretionary power to apply the income for the maintenance, education or benefit of the primary beneficiaries, the son and daughter. They would each become absolutely entitled to one half share of the capital and accumulated income upon attaining the age of 25.
As a result of the adult son's autistic disorder, the parties wished to vary the H Trust to permit the trustee to retain the trusts funds after the son's 25th birthday on trust, instead of making distributions to each of the primary beneficiaries when they each turned 25.
The principal issue for consideration by the Royal Court was whether or not the proposed variation of the H Trust would be for the benefit of the son and daughter and any future beneficiaries, whether unborn or unascertained and if so, whether the Royal Court should approve the variation on behalf of the beneficiaries.
The Royal Court made the initial finding of fact that the son was under a legal disability and was, as a result of this disability, unable to give instructions relating to, or give consent to, the relief claimed in the principal application.
Consequently, the Royal Court appointed an Advocate to act as special guardian of the son so that instructions could be given on his behalf.
The son and the minor daughter were each separately represented by their own Advocates. Submissions were also heard by an Advocate representing the interests of unborn or unascertained beneficiaries under the trust.
Trustees should note that it is common for the Royal Court to stipulate that all the beneficiaries are represented by separate Advocates and that the Royal Court will appoint an Advocate to represent the interests of unborn or unascertained beneficiaries.
The Royal Court approved the proposed arrangement to vary the H Trust under the Royal Court's express statutory power. The Royal Court held that it was satisfied that the variation appeared to be for the financial "benefit" of the son because the variation of the H Trust would enable the trustee to retain the trust funds on trust after the son's 25th birthday, which would be available to generate further investment growth and income for the son and daughter.
It was decided that the word "benefit" could be given a wide construction where necessary. The Royal Court also found that its discretion, whether to approve the application, was fettered only by the express statutory requirement that the variation must be for the benefit of those classes of beneficiaries stipulated under the relevant subsection of section 52 of the 1989 Law.
Useful comments were made by the Royal Court with respect to the extent that a Guernsey court will consider case law from other jurisdictions. Trustees of Guernsey trusts should consider these comments when investigating contentious or non-contentious issues which have no precedent in Guernsey case law.
The Royal Court noted that, because of the similarities in the statutory provisions of the trust laws, it will pay close regard to both English and Jersey common law authorities. It stated that cases from these two jurisdictions were persuasive and would be followed in relevant circumstances. This view reflects and re-enforces the Royal Court's current practise and the view of Guernsey practitioners.
In re the M Trust
Under the previous and current Guernsey trust legislation an outgoing trustee is entitled to "reasonable security" before transferring the trust assets to its successor.
That "reasonable security" is usually given in the form of a contractual indemnity from the successor trustee who will often undertake to obtain an indemnity from its future successor or successors on the same terms which gives rise to a "chain" of indemnities. These indemnities often involve protracted commercial negotiation as to their scope and tend to be complex and cumbersome in their drafting.
The 2007 Law introduced the concept of a statutory non-possessory lien. A trustee is entitled to a statutory non-possessory lien over the trust assets for expenses and liabilities incurred in connection with that trust. Notably the lien continues after the trustee retires (or is removed) regardless of whether the assets are held by a successor trustee or a beneficiary. The lien will apply irrespective of any indemnities entered into by the parties, unless expressly waived. The only specific exceptions are that the lien does not attach to real property, unidentifiable property nor to any property transferred to a bona fide purchaser for value.
While the statutory non-possessory lien is generally considered to be a helpful and positive innovation, the precise scope of the protection which it provides is not entirely clear from the legislation in a number of respects. In particular, while the application of the lien is clear in the context of the retirement or removal of a trustee from a trust which is continuing, the 2007 Law (which came into force just three days before this judgment) is unclear as to whether the statutory non-possessory lien applies in instances where a trust is terminated following an appointment of all the assets of the trust to a beneficiary. This issue arose in the context of a divorce settlement arising from an order made by the Family Division of the English High Court. The latter determined that the assets of the M Trust should fall to be divided within the nuptial settlement.
The trustee of the M Trust applied to the Royal Court and was granted an order authorising the termination of the M Trust and the appointment of the trust assets to the wife. The order also stipulated that the trustee was entitled to a non-possessory lien over the trust property for the purposes of securing the trustee's right to pay expenses from the trust property and be reimbursed from the trust property for all expenses and liabilities (existing, future, contingent or otherwise) (the lien).
Notably, the lien created by the Royal Court order was on substantially the same terms as the statutory non-possessory lien to which a trustee that retires (or is removed) would have been entitled to under the provisions of the 2007 Law.
Due to the ambiguity of the legislation as to whether the statutory non-possessory lien applies in instances where a trust is terminated following an appointment of all the assets of the trust to a beneficiary, the only way to put the issue beyond doubt (until legislative amendments or a general judgement by the Royal Court clarifying the position) is for the trustee to make an application to the Royal Court before the trust is terminated seeking directions to confirm the application of the lien.
This could avoid disputes in the future as to whether the trustee is entitled to a lien over trust property.
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