The Royal Court of Jersey has recently provided important guidance in relation to the circumstances in which the Court may hold the exercise of a fiduciary power to be invalid.
In the case of In the Representation of Jasmine Trustees Limited JRC196 (in which Appleby acted for the successful applicant) the Court took the exceptional step upon the application of a beneficiary to declare the appointment of Protectors and Trustees to be invalid.
In its judgment, the Court confirmed that a person (whether they are a retiring trustee, or any other person with a power of appointment under the trust instrument) is exercising a fiduciary power both in relation to a power to appoint new trustees and a power to appoint a new protector.
The Royal Court also stated that when exercising such a fiduciary power of appointment, the appointor is under a duty to act as follows:
- In good faith and in the interests of the beneficiaries as a whole;
- To act reasonably;
- To take into account relevant matters, and only those matters; and
- Not to act for an ulterior purpose.
In this exceptional case, the Court held that the appointments of new trustees and new protectors were invalid as the appointors had not acted in accordance with the four above principles identified by the Court, and the fiduciaries were thus effectively removed from office.
The Court's determination that the duties owed by appointors of trustees and protectors are the same, whether the appointor is an outgoing trustee or a majority of adult beneficiaries, is of interest and benefit to both trust practitioners and advisers alike.
The proceedings were brought by the trustees of two family trusts and initially concerned the appointments of new trustees and protectors in relation to two family trusts. The beneficiaries of both trusts were almost identical, and included a father, his three children (defined as an elder son, a younger son (together, the sons) and a daughter) and the seven grandchildren (four of whom were adults at the time of the hearing).
The trustees issued the proceedings as they had unexpectedly received a deed of removal and appointment of trustees executed by the then protector of both trusts (the father). The purported new trustee was incorporated in New Zealand and unknown to the trustees. Having received the deed, the trustees sought pertinent information from the new trustees but no satisfactory replies were provided. The trustees were also concerned that the father would not or could not explain his rationale in appointing Kairos. The trustees therefore sought directions from the Royal Court as to what if any action they should take regarding the purported appointment of new trustees.
Two further appointments took place shortly after the Representations were issued: the father retired as protector and appointed his sons to act in his place in respect of one trust, and in respect of the other, he resigned as protector prompting a majority of the adult beneficiaries (in fact, all of the adult beneficiaries other than the daughter) to appoint the sons to act as protectors. Both methods of appointment complied with the formalities required by each trust.
The daughter then issued a summons challenging the purported appointments of the sons as protectors of both trusts on the basis that they were invalid or, alternatively, that they ought to be removed.
Purported appointment of Trustees
By the time of the hearing, not only did the daughter object to the appointment of the new trustees, but the sons (as purported protectors) also attempted to remove the new trustees and the father had stated that he was content for the appointment to be 'withdrawn'.
The Court concluded that the father, when he appointed the new trustees, had failed to take into account relevant factors, such as the "expertise, experience, financial standing etc. of the propose trustee", and had not reached a decision that a reasonable appointor could have reached. The father had therefore not exercised the power in line with the required duties and the appointment was accordingly found to be invalid.
Purported appointment of Protectors
As regards the appointments of the protectors, these were also found to be invalid. It was necessary for the Court to consider a large section of the family's history in reaching its decision.
It was the daughter's position that the purported appointments of the sons as protectors of both trusts could not have been made by reasonable appointors for three main reasons:
- that there is an actual or potential conflict of interest arising from the litigation in the United States (see below);
- that the sons are not sufficiently independent from the father; and
- that there is a complete and irretrievable breakdown in relations between the daughter and the rest of the family on the other.
As stated above, the conflict of interest arises from the US proceedings brought by the daughter, against (amongst others) the father and the sons, which included allegations as to improper conduct in the administration of the companies which had been listed in the general release, and in which she had believed she had a beneficial interest. The proceedings also included allegations of forgery, fraudulent acts, breaches of fiduciary duty and conspiracy. The Court found that due to the remedies sought in the proceedings, the outcome of the US proceedings would have "material financial impact" on the sons.
As regards the lack of independence from the father, the sons' evidence provided in the US proceedings confirmed they had done whatever the father asked of them, included signing corporate documents, and had viewed their position as directors of the companies as "titular titles" only. This along with other factors and instances, led the daughter to believe that if the sons were confirmed as protectors, they would disregard their own fiduciary duties and act in accordance with the father's wishes.
Finally, submissions were made as to the seriousness of the breakdown in relations between the daughter and the sons and the loss of trust in her brothers after the preparation of a document referred to as a "general release" which, if she had signed it, would have been to their benefit. The purpose of the general release was to confirm in a legally binding document that the father would approve a distribution to fund the lease extension if the daughter released her rights to all and any property owned by the father, or in which he had an interest and included various non-compete clauses. In the end, the daughter did not sign the general release as the trustee decided that it would be more tax efficient for the lease extension funds to be provided by way of loan (which did not require protector consent) rather than by distribution.
The general release led to a complete breakdown in relations in the family: since then, the daughter has not had contact with her brothers. Indeed, the sons did not contact her despite her suffering with cancer, getting married and having a child.
The sons' deposition evidence in the US proceedings also set out their feelings towards their sister in that they agreed with the father that she was always after money and that they were angry with her for suing them. In those circumstances, it was submitted that it would be impossible for the sons to act impartially and fairly as protectors.
The father's position meanwhile was that he considered his sons to be the best persons to act as protectors for three main reasons: first, due to their professional qualifications; secondly, their appointment is supported by most of the beneficiaries; thirdly, the sons are members of the family and so could act as a link between the family and trustees. Although the father conceded that his relationship with the daughter was troubled, he thought the sons could work with the daughter.
For their part, the sons considered themselves able to faithfully discharge their duties to all the beneficiaries. However, the sons also stated that most of the family had lost trust and confidence in the trustees due in part to their decision to grant a loan to the daughter in 2010.
The Court's decision
The Court reminded itself that it is not for the Court to interfere with an appointor's decision if it would have made a different appointment; rather the Court's jurisdiction may only be invoked if the appointor had reached a decision that no reasonable appointor could reach.
The Court accepted that the trust instrument envisaged a degree of conflict of interest, and so the fact that the sons were also beneficiaries who may be thought to have adverse interests to the daughter was not a reason to hold their appointment as protectors invalid.
However, the Court did conclude that the appointments of the sons as protectors were invalid, for reasons which included the following:
- the "very significant" conflict of interest that exists between the sons and the daughter by reason of the US proceedings make it impossible for the sons to act fairly as protectors;
- the Court did not accept that the sons were acting in a "neutral and passive" way in the US proceedings;
- the sons have not shown themselves as acting independently from the father, for example simply signing documents when asked to do so by him even when such documents stripped the daughter of shares;
- the breakdown in relations between the daughter and the sons and the sons' demonstrable feelings of acrimony towards the daughter which makes it impossible for them to act fairly as protectors; and
- the background hostility and suspicion between the members of the family which would inevitably lead to a frequent involvement by the Court in the administration of the trusts.
The circumstances of the case may not have been as extreme as has been examined in other protector removal cases as Re The V R Family Trust 2009 JLR 202 (where the protector was engaged in litigation concerning the trust fund itself and therefore suffered with an extreme conflict of interest). The instant case, however, demonstrates how when the various circumstances of a matter are analysed in a comprehensive and forensic fashion it can lead to appointments being found to be invalid.
The case serves as an important reminder to appointors, whether trustees, protectors, or beneficiaries with a power of appointment, to consider their duties carefully when exercising fiduciary powers to ensure that they are acting reasonably, and in good faith, taking only into account relevant factors in making an appointment.
Advocate Fraser Robertson acted and appeared on behalf of the successful applicant beneficiary assisted by Amy Benest.
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.