On a Judgment of the Royal Court of Jersey of 9 January 2001 In the matter of the Esteem Settlement and the Number 52 Trust
Trusts - definition of "benefit" - whether a distribution can be made to a beneficiary’s creditor against the adult beneficiary’s wishes – whether the moral obligations of the beneficiary to his creditor should influence the trustee in that decision.
The trustee of two Jersey discretionary settlements sought direction from the Royal Court in an administrative application pursuant to Article 47 of the Trusts (Jersey) Law 1984.
The issue was whether the trustee should exercise its discretion to distribute the whole or part of the trusts’ assets to Grupo Torras S.A. ("GT") as the victim of a fraud perpetrated by (and the judgment creditor of) an adult beneficiary namely Sheikh Fahad Al-Sabah. The trustee and GT argued that it would be for his "benefit" so to do within the meaning of that word in the trust deeds and that the court should disregard the objections to such course by Sheikh Fahad who refused to accept that he was a wrongdoer.
Highlights in the 40 page judgment are:-
"40. We accept of course that the cases where a trustee will exercise a power of advancement in favour of a beneficiary against the express wishes of that beneficiary will be very few. But we hold that there is power to do so and that Sheikh Fahad’s objection to the proposed distribution in this case is not a bar to the Trustee (and therefore the Court) exercising the appropriate powers in the trust deeds.
48. …the word "benefit" is to be construed widely and goes beyond mere financial benefit. It encompasses all sorts of ways in which a beneficiary’s position can be made better. Nevertheless it is not open ended. There is an objective test, namely that the way in which the trustee proposes to deal with the capital can fairly be regarded as being for the benefit of the beneficiary. There is also a subjective test in that the trustee must genuinely believe that the appointment of capital will in fact be for the benefit of the beneficiary. A court is of course bound by exactly the same principles when, as here, the trustee has surrendered its discretion to the court. Most importantly the question of benefit is to be considered in a realistic and commonsense manner rather than in a theoretical or academic way.
59… a distribution by way of payment to GT in reduction of Sheikh Fahad’s debt would not be for his benefit.
(a) In the first place there is no benefit in any real sense in financial terms….
b) the fact that the debt arose out of fraud [cannot] make a payment of benefit to a debtor in circumstances where it would not be of benefit to a non-fraudulent debtor.
81. Trusts are established in the expectation that their legal structure will be respected. They are also established in the expectation that trustees will act only in the interests of the beneficiaries regardless of their own views as to the morality of the situation. Indeed, this is required of trustees by law. In our view trust law requires that, in such circumstances, trustees are alert to ensure that what is suggested is not in effect a back-door route of enabling a creditor to benefit. Once the front door (i.e. the lawful claim of the creditor against the trust assets) has been locked, the trustees must put aside their moral views and must apply the assets solely in the interests of and for the benefit of the beneficiaries. The Court is similarly bound. It is not in a position to do whatever it thinks ‘just’ to recompense the creditor."
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