Jersey: In The Matter Of The Representation Of Jasmine Trustees Limited [2015] JRC 196: Helpful Consideration Of The Duties Of Fiduciaries Exercising Powers Of Appointment

On 23 September 2015 the Royal Court gave judgment in In the matter of the Representation of Jasmine Trustees Limited [2015] JRC 196. The Court considered whether the appointments of new trustees and new protectors had been validly made giving particular consideration to the duties of the persons who held the powers of appointment.

The Facts

Jasmine Trustees Limited (the "Trustee") was the trustee of two trusts, the Piedmont Trust (the "P Trust") and the Riviera Trust (the "R Trust"), which were established to benefit various descendants of the father who was also named as the original or first protector of both the P and R Trusts. Lutea Trustees Limited ("Lutea") was also appointed as co-trustee of the R Trust. The P and R Trusts are discretionary trusts governed by Jersey law.

The Settlor of the P Trust executed three letters of wishes, the first executed at the time of the creation of the P Trust and a further letter executed in February 2006 expressed essentially similar wishes, namely that the P Trust was intended to provide for the father's grandchildren but it should also provide for the father during his lifetime and on his death it was to be divided into three equal parts, one for each of the father's children. The third letter of wishes was provided by the Settlor in July 2010 at a time when the relationship between the father and the daughter had deteriorated significantly. It stated that the funds held by the trust should be divided into two equal funds one for each of the father's two sons' children.

Two main issues arose in 2014 with changes to those holding the positions of trustee and protectors. The first issue related to the appointment of new trustees of the P and R Trusts which were considered by some of the beneficiaries as being unsuitable. The second issue related to the appointment of new protectors of the P and R Trusts, the validity of these appointments was challenged by the daughter. These issues are dealt with in turn below in more detail.

The Appointment of New Trustees

The trust deed of the P Trust provided that the protector, amongst other wide ranging powers, had the power to appoint and remove trustees of the P Trust. The trust deed of the R Trust provided the protector of that trust with a similar power.

On 31 January 2014 the father as protector of the P and R Trusts executed deeds of removal and appointment of trustees by which the Trustee and Lutea were removed and Kairos Trustees (NZ) Limited ("Kairos") was appointed in their place. The Trustee and Lutea were surprised to learn that they were to be removed as trustees but took steps to obtain appropriate due diligence on the incoming trustee. No reply was received from the incoming trustee until 10 March 2014 and the information provided raised more questions than it answered. After checking the information that had been provided the Trustee and Lutea ascertained that there were a number of gaps and had significant concerns as to the suitability of Kairos to act as trustee.

The Trustee notified the father of its concerns and stated that unless all of the adult beneficiaries agreed to the appointment the trustees would have to bring the matter before the Royal Court to seek directions. Following consultation by the Trustee and Lutea with the adult beneficiaries it became clear that they did not all agree to the appointment of Kairos as trustee. Consequently on 6 May 2014 the Trustee and Lutea presented a representation for each trust seeking directions from the Court.

In December 2014 the brothers, as protectors of the P and R Trusts, used the powers contained in the trust deeds to remove Kairos as trustee without purporting to appoint a new trustee in its place.

The Decision of the Royal Court

Although all of the beneficiaries who were before the Court agreed that they did not want Kairos to be trustee the Court stated that the validity of the appointment needed to be resolved due to the challenge to the appointment of the sons as protectors of the P and R Trusts which had arisen during the course of the proceedings. If the challenge was accepted by the Court then the sons would not be the protectors of the P and R Trusts and consequently would not have had the power to remove Kairos as trustee.

The Court held, having considered the arguments advanced by the parties, that the appointment of the new trustee Kairos was invalid. The Court held that the power to appoint trustees is a fiduciary power even if it is vested in someone other than an outgoing trustee; which in respect of the P and R Trusts was vested in a protector. The Court also held that the fact that a power to appoint new trustees, as was the case under the trust deeds of both the P and R Trusts, is to be exercised by the protector rather than the outgoing trustees made no difference to the duties that were imposed on the person holding that power.

The Court held that the holder of a fiduciary power must not exercise that power in an irrational manner, meaning that the holder of that power must not reach a decision which no reasonable holder of such a power could have arrived at. The Court in explaining its reasons for reaching is decision made a number of observations, including:

1. that the Court has a supervisory jurisdiction in respect of trusts requiring it to protect the interests of beneficiaries and felt that it would be an abandonment of that role if it refused to act and left the beneficiaries to live with the consequences of a decision no reasonable holder of a power could have reached;

2. there was authority in Jersey jurisprudence to support taking this approach as well as in other jurisdictions notably the Cayman Islands; and

3. such an approach was consistent with that taken by the Court when it blessed 'momentous decisions' where the Court will not bless a decision if it is one that no reasonable trustee could have reached.

The Court stressed that it could not overturn a decision made by a holder of a power simply because it would have arrived at a different conclusion and reiterated that:

"A settlor does not choose the Court as the donee of the relevant power; he chooses the person appointed in or by virtue of the provisions in the trust deed. It is the donee upon whom the power has been conferred. The Court's role is merely a supervisory one."

Where a decision falls outside the range of decisions within which "reasonable disagreement" is possible and is therefore a decision which no reasonable power holder could have arrived at the Court may overturn the power holder's decision.

In this case the Court determined that the appointment of Kairos was invalid, concluding that the father as protector had failed to "take into account material matters" including the expertise, experience and financial standing of the proposed new trustee of the P and R Trusts, had taken into account irrelevant matters and arrived at a decision that no reasonable appointer could have arrived at. The Court also held that the appointment of the new trustee and the removal of the old trustee(s) were so closely linked that they stood or fell together. Consequently the removal of the Trustee and Lutea fell away when the Court found the appointment of Kairos to be invalid and they remained as trustees.

The Appointment of New Protectors

In June and July 2014 the father executed documents to retire as protector of the P and R Trusts and ultimately his two sons were appointed as replacement protectors of both trusts. On 11 July 2014 the daughter issued a summons in the ongoing proceedings requesting that the Court declare  the appointment of her brothers as protectors of the P and R Trusts to be invalid or alternatively remove them from their positions.

The daughter's position was based on a number of grounds which can be summarised as follows:

1. the sons had an actual or potential conflict of interest due to ongoing litigation in the United States involving the daughter on the one hand and the father and sons on the other;

2. the sons were not sufficiently independent of the father and had not exercised their fiduciary duties in relation to various US companies, of which they were or had been directors, appropriately;

3. that there had been a complete and irretrievable breakdown in relations between the daughter and the sons which made it impossible for them to act or be seen to act fairly as protectors of trusts of which the daughter and her child were beneficiaries.

The issue for the Court to determine was simply whether, in the circumstances, the appointments of the sons as protectors were essentially valid as it had been accepted by all the parties that the requisite formalities had been complied with.

The Decision of the Royal Court

The Court reiterated that it could only hold an exercise of a power to be invalid in limited circumstances and that considering that it would have reached a different decision was insufficient.

The Court noted that the trust deeds of the P and R Trusts clearly envisaged "the existence of a protector who could consent to appointments which would benefit him or his family and could therefore be considered to have an adverse interest to the other beneficiaries" and that consequently the fact that the sons could be viewed as having adverse interests to the daughter and her family due to the fact that they and their children were also beneficiaries of the P and R Trusts was not a ground for questioning their appointment.

The Court ultimately reached the clear conclusion that although the sons appeared, prima facie, to possess the necessary skills and experience to carry out the duties of protector in the circumstances of this case the decision to appoint the sons as protectors of the P and R Trusts was irrational. The Court stated that although not every conflict of interest renders a protector's position untenable and regard must be had to the how pervasive the effect is, the ongoing US litigation meant that it was not possible for the sons to be viewed as being able to act fairly as protector.

It was accepted by the Court that because the sons' previous conduct had shown that they were willing to do exactly as their father wished and that they paid little attention to their fiduciary duties the daughter had legitimate fears as to how the sons would perform their functions as protector. The Court also agreed that there had been a breakdown in relations between the daughter and the sons making it impossible for them to be seen to be in a position to act fairly as protector.

The Court held in light of these conclusions that the appointment of the sons as protectors of the P and R Trusts "would undoubtedly have a seriously detrimental effect on the administration of the Trusts" and declared it to be invalid.

Duties of Fiduciaries When Making Decisions

In this judgment the Court helpfully identified a non-exhaustive list of duties that the protector, as a fiduciary, was under when exercising its power to appoint a new trustee. The duties identified were:

1. to act in good faith and in the interests of the beneficiaries as a whole;

2. to reach a decision open to a reasonable appointor;

3. to take into account relevant matters and only those matters; and

4. not to act for an ulterior purpose.

The Court held that these duties also applied to an appointor when appointing a new protector of a trust, even where the power of appointment was that of the majority of the adult beneficiaries as was the case with the P Trust.

Comment

This judgment provides a useful reminder to trustees and legal advisors alike of the limited circumstances in which the Court will intervene in a decision made by a power holder and the matters that the Court will consider in determining whether the decision of the power holder is one which no reasonable holder of that power could have reached.

The Court also helpfully highlighted some of the key duties of fiduciaries which need to be considered whenever a power holder makes a decision regarding the exercise of that power.

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.

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