Close Trustees (Switzerland) SA v Castro  EWCH 1267
This English law case was an application by Close Trustees
(Switzerland) SA and Close Brothers Trust Company (the
"Trustees") in respect of a trust where
the life tenant was entitled to the income. After the life
tenant's death the capital would be held for the benefit of her
children. The life tenant was seeking damages and compensation from
both the investment management companies and the Trustees and
Protector for losses in respect of the performance of investments
held in the trust through the Californian Courts. The Trustees
sought the approval of the Court for the retention of a proportion
of the income which would otherwise be paid out to the life tenant
to ensure that funds were available to reimburse the Trustees'
legal costs. The case did not consider whether the Trustees were
entitled to be reimbursed for their legal costs as this would
depend upon the outcome of the Californian case, but just whether
the retention was permissible given the effect that this would have
on the life tenant's income.
The life tenant had what were described as
"considerable" income requirements during that time
period and the retention would reduce her income from the trust
considerably. The Trustees argued that as the only claimant in the
proceedings was the life tenant then any costs should be borne by
the income and not the capital. The life tenant argued that the
costs of legal proceedings should be borne by the capital.
In this case, the Court held there was no conflict of interest
as the Trustees were not seeking to make the retention in order to
prevent the claimant bringing the claim. The case in California was
being funded on a contingency basis and therefore the claimant was
not relying on her income from the Trust to bring the claim. The
question was whether the retention should be from income or capital
and this was a matter between the life tenant and the capital
beneficiaries and the Trustees did not have a conflict of interest
in this matter.
The Court confirmed that where trustees had actual or contingent
liabilities which might be payable out of the Trust Fund then such
trustees have power to retain the income or capital by way of
retention to ensure that such funds to reimburse the Trustees would
The starting point was that the costs of Court proceedings
incurred for the benefit of the trust as a whole should normally be
taken from the capital. However, the Trustees must also ensure
equity between the beneficiaries which could in some circumstances
justify the costs being borne by the income. There is no general
rule that if a life tenant makes an unsuccessful claim that the
trustees' costs should be borne from the income and therefore
by that life tenant. In such cases trustees needed also to consider
where the benefit of the action fell. In this case the Court held
that if the claim was successful then any damages payable by the
investment management companies would be received by the Trustees
for the benefit of the Trust Fund as a whole and therefore would be
to the advantage of both the life tenant and the capital
beneficiaries. Although the Trustees could take into account that
there should be a greater burden on those beneficiaries who
supported the litigation, this should not be the sole
made their case for a retention solely from the income.
This is an interesting case that confirms the starting point for
the costs of litigation is that they should be taken from the
capital. However, trustees do have discretion to pay such costs
from income if this would be equitable. Trustees should not,
however, just assume that a beneficiary who brings an unsuccessful
claim should bear the costs from his or her share. This case did
not consider the circumstances where trustees may recover the costs
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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