What considerations are involved when a trustee asks the Court to approve its decisions?
At the material time, A Trustees Limited (the "Trustee") had become the sole trustee of a discretionary settlement (the "Settlement") established in 1987 for the benefit of V and W (respectively, husband and wife) and their issue.
V and W separated in 2004 and divorce proceedings were issued a year later. As part of moving towards a financial settlement, V and W agreed to split their assets in a particular way and, to that end, the Trustee was invited to create a separate sub-fund (the "W Fund") out of the Settlement which would be for the benefit of W, the children and any remoter issue. The Trustee agreed to this and the W Fund (of which V was not a beneficiary) was established in May 2006. Approximately £22 million and a one-third interest in a Bermudan property were transferred from the Settlement to the W Fund.
As a result of legislative changes to be implemented by the 2008 UK budget, on 7 March 2008 W's advisors approached the Trustee (in its capacity as trustee of the W Fund) with a list of three proposals (the "Proposals") designed to improve the fiscal position of V. Specifically, the Trustee was asked to take the following steps prior to the coming into force of the new measures on 6 April 2008:
(i) to advance £11 million to W as a capital distribution to address her income needs over the next thirty years;
(ii) to assign the outstanding two-thirds interest in the Bermudan property from the Settlement to the W Fund in exchange for consideration equal to the net market value of that interest; and
(iii) finally, to appoint the Bermudan property and any remaining assets of the W Fund out on to the terms of a new trust which would have the same beneficiaries (and be broadly on the same terms) as the W Fund.
Faced with the Proposals (which involved making a capital distribution of approximately half of the value of the W Fund) and having slightly less than a month to make a decision, the Trustee acted promptly. It instructed both Jersey lawyers and specialist UK tax counsel to provide legal advice and asked Saffrey Champness, the existing tax advisors to the Settlement, for their view on the merits of the Proposals. It also issued a representation convening W and the children to attend the Royal Court on 3 April 2008 (the final working day before the deadline for action on the Proposals) when the Trustee intended to ask the Court to give its blessing to its decisions.
In the interim, the Trustee was put on notice that W was intending to proceed with an application for ancillary relief in connection with the divorce before the High Court in England (the "English Proceedings"), part of which would involve her seeking an order varying the terms of both the Settlement and the W Fund.
In the event, and in the context of advice it had received, the Trustee decided to (i) defer the second of the Proposals relating to the transfer of the outstanding two-thirds interest in the Bermudan property and (ii) to agree to the third Proposal to establish a new trust which would hold the balance of the assets of the W Fund. It declined, however, to agree to the first Proposal to advance the capital sum of £11 million to W, instead resolving only to make an appointment to her of a sum in the range of £1.5 million to £2.5 million.
On 3 April 2008, therefore, the Court was asked by the Trustee to approve its decisions in respect of the Proposals. At the same hearing, however, W invited the Court not only to withhold its approval of the Trustee's decision in respect of the capital advance to be made to her, but also to direct the Trustee to advance to her the full sum of £11 million in accordance with the original Proposals.
The Court confirmed that the basic principles which it would apply in a case such as this (i.e. one where the trustee concerned had not surrendered its discretion to the Court in order for the Court to make the relevant decision but rather had exercised its discretion and was simply asking the Court to approve that exercise of discretion) were as follows:
(i) to approve a decision of a trustee to Court must be satisfied that:
a) the trustee's opinion had been formed in good faith; and
b) the opinion is one which a reasonable trustee could reach; and
c) the opinion has not been vitiated by any actual or potential conflict of interest.
(ii) to vary a decision of a trustee (as requested by W in this case), the Court had to be satisfied that it was one which no reasonable trustee could have made - it would not be sufficient to overturn a trustee's decision simply because the Court might itself have reached a different decision.
In this case the Court found that there were no proper grounds for the trustee of the W Fund to reasonably refuse the Proposal to advance the sum of £11 million to W. The sole function of the Trustee (in its capacity as trustee of the W Fund) was to act in the best interests of the beneficiaries of the W Fund and the Court held that all of the tax and legal advice received together with the views of both W and the children pointed towards the making of a capital appointment in the region of the sum requested by W.
The Court also found that the Trustee's concern over acceding to this Proposal actually stemmed from not wanting to compromise the position of V (i.e. the husband) in the English Proceedings. In effect, the Trustee was allowing its position as trustee of the Settlement (of which V was the principal beneficiary) to affect its judgement in relation to the Proposals which, of course, related only to the W Fund. Effectively, the decision of the Trustee in this regard had been vitiated by a conflict of interest.
Accordingly, whilst the Court did approve the decision of the Trustee in respect of the second and third Proposals, it declined to do so in relation to the decision made in respect of the first Proposal and instead directed the Trustee to make an appointment of capital to W in the sum of £11 million.
This case helpfully confirms the basis upon which the Royal Court will either give or withhold its approval to a decision made by trustees in respect of the exercise by them of discretionary powers. It also illustrates the dangers inherent in a trustee continuing to act as sole trustee of two related trusts whose beneficiaries may have competing interests over the same assets.
Of comfort to professional trustees, however, will be the views expressed by the Court in relation to the Trustee's decision to bring the matter before the Court for its approval. In summary, the points to be derived are:
(i) that the Trustee had "acted prudently" in bringing its decision before the Court in advance of acting on that decision;
(ii) that such applications by trustees generally are to be encouraged in the interests of forestalling hostile litigation after the event; and
(iii) that the Court "should be slow to penalise trustees whose decisions are not in fact approved".
In this case the Court expressed the view that the Trustee should be able to recover its costs from the assets of the W Fund in the ordinary way notwithstanding the fact that the Court had declined to approve one of its decisions.
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.