Where a Jersey based trustee is proposing to make a "momentous" decision in relation to a trust, the trustee will generally be best advised to seek the blessing of the court before putting that decision into effect.
The Jersey authorities in relation to applications for the court's approval of a trustee's decision are well established. In summary, the court must be satisfied that the trustee's opinion on the decision it wishes to take has been made in good faith, that the opinion is one of a reasonable trustee and that its decision has not been invalidated by any actual or potential conflict of interest. Importantly, the court's role on an application for approval of a trustee's decision does not extend to substituting its decision for that of the trustee. Accordingly, where a trustee is seeking the court's approval for its proposed course of action, the court may only vary the trustee's decision if it is one which no reasonable trustee could have made. Thus, provided the trustee's decision falls within the range of decisions which a reasonable trustee could have made, the court cannot substitute its own decision simply because it would have reached a different decision.
In the recent case of Re A Trustees Limited  JRC097, the Royal Court was faced with an application for approval of a trustee's decision in circumstances where the court considered that the decision was influenced by a conflict of interest on the part of the trustee, which was the trustee of a Jersey discretionary trust.
Following the separation of the husband and wife (who were both beneficiaries of the trust), arrangements had been agreed in relation to the financial provision of the wife which involved the creation of a sub-fund from the trust. The sub-fund was for the benefit of the wife, the children of the marriage and remoter issue. It was revocable and contained substantial assets.
In the face of impending fiscal changes in the UK brought about by the Finance Act 2008, the wife asked the trustee to advance substantial assets from the sub-fund to her before 6 April 2008. The request included a request that £11 million (representing approximately half of the sub-fund) be advanced. The request was supported by tax advice obtained in the UK by the wife. Having sought its own advice through English tax counsel, the trustee decided on 2 April 2008 not to advance the £11 million requested, but rather to advance a sum in the region of £1.5 to £2.5 million to the wife and sought the Royal Court's approval of that decision. The application to the Royal Court was heard on 3 April 2008, one working day before the 6 April 2008 deadline.
It is clear from the judgment of the Royal Court that the court considered the proposals which had been put forward by the wife to be entirely reasonable. Indeed, the court stated that it could not understand why the trustee was reluctant to give substantial effect to what it described as properly thought out and reasonable requests based on professional legal and tax advice. The court formed the view that the trustee's reluctance to give effect to the proposals of the wife was as a result of concerns which it had in relation to proceedings ancillary to the divorce of the husband and the wife in England and the potential impact on the husband of those proceedings. The court stated that the trustee did not appear to have considered the potential for conflict between its roles as trustee of the trust (with power to revoke the sub-fund) and as trustee of the sub-fund, in circumstances in which the husband and the wife were estranged and where divorce proceedings were yet to be finalised. It is clear from the judgment that the court formed the view that had the trustee been the trustee of the sub-fund only, there could be no good reason for it not to give substantial effect to the request of the wife.
The court went on to find that the trustee's decision was not a decision of a reasonable trustee and was a decision which had been influenced by a conflict of interest. The court formed the view that this was a case where the wife was entitled to have a decision made independently of any competing duty and that it was appropriate, therefore, for the court to interfere with the exercise of the trustee's powers and to direct the trustee to make the requested distribution to the wife.
In reaching its decision the court restated the general principle that beneficiaries are entitled to require that the decisions of trustees are made independently of any competing duty. The court also provided some guidance as to how a trustee might successfully manage conflicts and cited the judgment of Hart J in Public Trustee v Cooper (20 December 1999) where three possible ways of managing a conflict were identified. These were:
- For the trustee to resign (although this may not always be practicable).
- For the trustee to surrender its discretion to the court (where the conflict is so pervasive that this is the only practical alternative).
- For the trustee to proceed to make its own decision in circumstances where despite a conflict existing, the trustee considers that it may honestly and reasonably believe that it can fairly and reasonably take the decision. In these circumstances the court stated that it would be prudent for the trustee to seek the court's approval of its decision in advance since if it does not, it faces the risk of having to demonstrate in hostile litigation both that the decision was one which any reasonable body of trustees might have taken and also that the decision was not in fact influenced by the conflict.
In this case, and despite the failure on the part of the trustee to acknowledge any conflict of interest, the court considered that the trustee had acted prudently in bringing its decision to the court in advance of implementing the decision and the trustee was ultimately awarded its costs of the application out of the sub-fund. The court reiterated the significant benefit of applying to court for directions prior to implementing a momentous decision – that is to avoid the potential for hostile litigation by disaffected beneficiaries. The court went on to encourage such applications and stated that where such an application is made, the court should be slow to penalise a trustee whose decision is not in fact approved.
This article first appeared in the autumn 2008 issue of Appleby Jersey's Resolution newsletter.
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.