In a recent decision, the Royal Court of Jersey set aside the appointment of trustees under the provisions of the Trusts (Jersey) Law 1984 and clarified the extent of its power to ratify actions taken by trustees whose appointment had been quashed.
In the recent decision of In the Matter of the Z Trust  JRC 048 the Royal Court's statutory jurisdiction to set aside the exercise of fiduciary powers was used to set aside the appointment of new trustees by a settlor.
So far, so good. However, following the setting aside of the appointment of new trustees what would become of the transactions undertaken by the purported trustees during the course of their 'trusteeship'? In this recent decision, the Royal Court of Jersey proceeded to consider carefully and clarify the extent of its power to ratify actions taken by purported trustees prior to their appointment being quashed.
The application was brought by a beneficiary of a Jersey law trust (the Trust), the principal asset of which was the issued share capital in a foreign (ie non-Jersey) company (the Company), which owned property in England. The application arose out of various appointments, which resulted in significant adverse tax consequences for the beneficiaries of the Trust. The appointments can be summarized as follows:
- the appointment by the late settlor of UK-resident trustees (the Purported Trustees);
- the appointment by the retiring directors of the Company of a UK-incorporated director (being a company controlled by the Purported Trustees); and
- the transfer of shares in the Company to a UKincorporated nominee for the Purported Trustees (i)–(iii) inclusive will be referred to as the Appointments.
The settlor's reason for appointing trustees resident in the UK was principally her misconceived belief that the trust assets would be better protected in the UK from a possible attack by members of her extended family.
The settlor had received a tax note from the solicitors' firm at which the purported trustees were employed, which identified some potential implications of the Trust and the Company being moved to the UK. However, the tax note failed to quantify the tax that would be payable and did not make clear the tax impact at both company and trust level. Despite the tax note recommending that further advice be taken, this was not obtained by the settlor who was in poor health and whose health was of paramount concern to her and her husband at that time.
Accordingly, the Appointments were made without the settlor having taken detailed tax advice on the consequences of the Trust becoming resident in the UK, and no calculations were undertaken to quantify the extent of the tax consequences. As a consequence of the move of the Trust and the Company onshore, UK tax liabilities approaching 40 per cent of the value of the trust assets were incurred.
The setting-aside of the Appointments
The Royal Court observed that it is well established as a matter of Jersey law that a power to appoint new trustees is a fiduciary power, even where the power is vested in a person other than the outgoing trustee.
The Royal Court's statutory jurisdiction for setting aside the exercise of a fiduciary power is contained in Articles 47G and 47H of the Trusts (Jersey) Law 1984 (the Trusts Law).
Article 47G of the Trusts Law closely mirrors the test for setting aside transfers, dispositions, and appointments by a fiduciary on the grounds of mistake, which had been established through case law (see eg Re The B Life Interest Settlement  JRC 229). It provides the court with power to set aside the exercise of a fiduciary power in relation to a trust in circumstances where: (i) the fiduciary made a mistake in relation to the exercise of his or her power; (ii) the fiduciary would not have exercised the power, or would not have exercised the power in the way it was exercised, but for that mistake; and (iii) the mistake is of so serious a character as to render it just for the Court to make the order sought.
Article 47H of the trusts law reflects the test for setting aside the exercise of fiduciary powers on the grounds of the rule in Hastings Bass as set out in the decisions of the Royal Court of Jersey prior to the Supreme Court's decision in Pitt v Holt  2 AC 108. Pursuant to Article 47H, the Royal Court can declare the exercise of a fiduciary power in relation to a trust invalid where the fiduciary in exercising the power: (i) failed to take any relevant considerations into account or took into account irrelevant considerations; and (ii) would not have exercised the power, or would not have exercised the power in the way it was so exercised, but for that failure to take into account relevant considerations, or but for its taking irrelevant considerations into account. Importantly, Article 47H specifically provides that it is irrelevant whether or not the fiduciary was at fault in exercising the power (thereby negating, for the purposes of Jersey law, that aspect of Pitt v Holt).
The court decided that the exercise by the settlor of the power to appoint the purported trustees could be impugned and set aside under either Article 47G or 47H of the Trusts Law.
Applying Article 47G of the Trusts Law, the court determined that the settlor was mistaken when exercising the power of appointment in that she: (i) failed to understand that the power was a fiduciary power to be exercised in the interests of all of the beneficiaries; (ii) wrongly believed that the exercise of the power would achieve her objectives of protecting the trust assets from her wider family; and (iii) did not appreciate and was mistaken as to the tax consequences of the transaction. Further, the court found that the settlor would not have exercised the power of appointment had she appreciated the true effect of the transaction. Applying the final limb of the test for mistake, the court determined that the mistake was of sufficiently serious a character as to render it just for the court to grant the relief sought.
The court also considered the requirements of Article 47H satisfied in that the settlor failed to take into account the true effect of the steps she was taking and the extent of the tax consequences and, had she been aware of such relevant considerations she would not have appointed the UK-resident trustees. The court observed that, in determining whether the late settlor would still have exercised the power of appointment in the same way had she taken into account 'relevant considerations'; an objective test must be applied based 'on the reasonable person acting in accordance with his or her duties'.
With regard to the appointment of the UK director and the transfer of the shares in the Company, the court determined that these transactions were undertaken for the sole purpose of giving effect to the exercise of the power of appointment and, accordingly, were treated as one related transaction. In setting aside these transactions, the court relied on Article 47I(3) of the trusts law, which allows the court to make orders consequential upon an order under Article 47G or 47H of the trusts law. The court was satisfied that making this order would not affect the position of a third party purchaser of real property from the company who had not been given notice of the grounds upon which the UK director's appointment might be avoided.
While the effect of the orders was to reinstate the retired trustee as trustee, and to deem to have it continued as trustee throughout, the court accepted that the retired trustee would not choose to resume trusteeship in the circumstances and gave directions blessing the retired trustee's decision to appoint a new trustee chosen by the beneficiary. The court made further orders under Article 45 of the Trusts Law; it released both (i) the retired trustee from any liability for not having discharged its duties to administer the trust during the period when it thought it had retired and had been replaced by the purported trustees and (ii) the purported trustees from liability for intermeddling with the trust property as trustees de son tort.
During the course of its 'trusteeship', the purported trustee had carried out two dispositive acts and a number of administrative acts which it sought to have ratified by the court. Although the court had relieved the purported trustees from personal liability, it recognized that such actions may be impugned on the basis that the retired trustee (which was the current trustee) did not participate in them or because the power or discretion purportedly exercised by the Purported Trustees was not able to be exercised by them as trustees de son tort.
The parties sought to rely on the Royal Court's earlier decision of Re BB, A and D 2011 JLR 672, in which the court ratified certain actions of a trustee de son tort (the trustee in that case not having been appointed by the correct power holder so that was a case of a void appointment rather than a voidable one) which it did in the exercise of its inherent jurisdiction to 'supervise and where necessary or appropriate [to] intervene in the administration of the trust'. The court considered, in reliance on paragraphs 42–82 of Lewin on Trusts, 18th edition that this jurisdiction arose from the need to avoid the havoc that would be caused from having to unscramble all of the actions of the purported trustees over several years and the trustees seeking to recover trust property from beneficiaries. However, the principle relied on in that case had not been the subject of further judicial scrutiny and had attracted adverse commentary. In particular, it had been asserted that:
- the passage referred to in Lewin related to a possible power on the part of trustees of certain trusts to confirm the exercise of powers purportedly exercised by the trustee de son tort, which is different from ratification by the Court (see Francis Tregear QC's article for Trust & Trustees, Vol 19, No 1, February 2013, pp 23–30); and
- Article 51 of the Trusts (Jersey) Law 1984 or the inherent jurisdiction cannot be relied on by the court to ratify past conduct of improperly appointed trustees, nor could it 'write into a trust instrument a retrospective power of ratification' which did not exist in the trust instrument itself, on the basis that this would amount to a variation of a trust which the Royal Court does not have power to do pursuant to either its inherent jurisdiction or its powers under Article 51 of the Trusts (Jersey) Law 1984 (see Dakis Hagen's and Bruce Lincoln's article for Trust & Trustees, Vol 19, No 5, June 2013 pp 469–74).
Accordingly, the court took the opportunity to clarify the scope of its jurisdiction to ratify or confirm actions taken by purported trustees. It was greatly assisted in this task by an opinion prepared by Lynton Tucker.
The court referred to three forms of ratification which it said may have the same practical result but which were conceptually different:
- Confirmation by perfection of an imperfect act or transaction. For example, confirmation by a principal of a contract entered into by an agent without authority. In such cases, a transaction which is capable of being set-aside becomes fully valid and enforceable.
- Confirmation by replacement of a doubtful transaction by a valid one with similar effect. In such cases, the state of affairs that was intended to have been effected by the doubtful transaction is brought into effect by a second, fully effective, transaction. It is crucial for this form of confirmation that the power remains exercisable.
- Confirmation by non-intervention in acts or omissions, which may not have been authorized but which were acted upon with the effect that the trusts are administered on the same basis as if those acts or omissions, had been authorized. The justification for non-intervention would be that the havoc and distress caused to the beneficiaries would outweigh the benefit in the trustee seeking to restore the value lost to the trust fund through the invalid acts. The court was clear that this form of confirmation will not be available if nothing has been done to give effect to the purported exercise of the power—for instance, if trust property purportedly appointed to a beneficiary absolutely has not in fact been transferred and remains in the trustee's hands.
The court drew a distinction between validation of invalid exercises of administrative powers and validation of invalid exercises of dispositive powers. The latter involved a change in the trusts on which the property was held and potentially the transfer of the underlying property to a beneficiary. Accordingly, the first form of confirmation (ie the Court perfecting or validating a hitherto invalid exercise of the power) would not be available in respect of dispositive powers as this would amount to the court varying the trust. It is well established under Jersey law that the court has no power to vary a trust save (i) in accordance with the court's recognized jurisdiction under Article 47(1) of the trusts law to consent on behalf of minor, unborn and unascertained beneficiaries to vary a trust in a case where all adult beneficiaries consent or (ii) in the context of a compromise of a dispute concerning a trust. So while the court could ratify the invalid exercise of administrative powers (even in cases where the trustees themselves would not have had power to do what the Court would authorize) the court had no power to ratify the purported exercise of dispositive powers.
While having much the same effect as ratification, the court considered that orders based on the second and third forms of confirmation would be preferable in the circumstances of the case. In particular:
- The present case involved the destruction of the validity of the appointment of the trustees (the exact opposite of ratification) and thus was different from Re BB where the goal was to preserve the validity of acts undertaken by the purported trustees. However, there was no difficulty in the trustee confirming the desired acts by re-exercising the power to the same effect or continuing to administer the trusts as if the acts were valid.
- Certain of the acts sought to be confirmed were acts of the company as to which there was doubt that the court had power to ratify. However, the court could direct the trustee to procure that the company continued to be administered as if the transactions had been procured or permitted by duly authorized trustees.
- The consequence of the court ratifying the administrative actions of the Purported Trustees, including allowing the sale of property by the company, might have been to confirm that the affairs of the company were indeed administered in the UK for tax purposes.
- The court observed that there are doubts as to the concept of validation by the court of invalid exercises of dispositive powers. Although this would rule out the first form of confirmation, the second and third forms of confirmation would generally be available.
In reaching its decision the court considered that the administrative powers conferred on the retired trustee or the new trustee under the trust deed (which expressly included the powers of an absolute beneficial owner of the trust property) were wide enough for the trustees to decide to leave the acts or omissions of the Purported Trustees undisturbed so that the trust would be administered on the basis that the acts or omissions had been validly done by, or with the authority of, duly appointed trustees. It was considered that the court could direct the trustee not to intervene in the unauthorized administrative acts and the unauthorized dispositive act of allowing the settlor's husband to live in the trust property on a gratuitous basis (as an action to recover compensation from him now for non-payment of rent in circumstances where his occupation had previously been agreed to be without charge would be unlikely to succeed and would cause aggravation to the family).
In relation to the further dispositive act of the Purported Trustees, by which they made a substantial distribution to a beneficiary, the court considered that the retired trustee or the new trustee had the power to confirm the distribution by way of a fresh exercise of the power to appoint in his favour (ie confirmation by replacement) and that this would be preferable over directing the Trustee merely not to seek to recover the property purportedly appointed to the beneficiary.
Rather than leave it to the retired trustee or the new trustee to consider what should be done about the invalid acts and omissions, the court adopted a pragmatic approach and considered that there was a 'sound basis' for an order directing them to take the appropriate steps. In particular, the Purported Trustees plainly could not exercise any discretion as trustees in view of the court having invalidated their appointment. The retired trustee was restored as trustee but had not acted as such for several years and was in no position to exercise its discretion. The new trustee had not yet been appointed and the court felt that it needed to ensure that all parties would know where they stand as a result of the court's orders.
However, the judgment sets clear limits on how far the court can go by way of ratification. The court observed that the kind of case which may cause difficulty included where the power which was originally sought to be exercised had lapsed by the time that the defective appointment was discovered, or can no longer be exercised in the manner originally intended, and no distributions have been made to give effect to the invalid exercise of the power. In such circumstances, the only way of resolving matters might be to apply to the court to have the trust varied pursuant to Article 47(1) of the Trusts Law or to bring a claim against the professional advisers concerned.
This carefully reasoned decision, which is of practical significance to the trust industry, highlights the importance that the Royal Court of Jersey places on securing the efficient and effective administration of Jersey law trusts.
In addition to illustrating the application of the Jersey statutory provisions, which allow for the exercise of fiduciary powers in relation to a trust to be set aside, the judgment provides welcome clarification of the legal basis and the extent of the power of trustees and the court to confirm actions taken by invalidly appointed trustees (and consequential actions taken by invalidly appointed directors of a company wholly owned by a trust). However, as each case will turn on its particular circumstances and ratification may not always be available, specific advice should be sought in connection with actions taken by invalidly appointed fiduciaries.
This article originally appeared in Trusts & Trustees Advance Access published July 8, 2016
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.