Bermuda: In The Courts: Trust Disputes

Trustees

In Bermuda, the Supreme Court considered whether it has jurisdiction to require the directors of a corporate trustee to resign. The court held in In the Matter of the X Trust that it has no jurisdiction to direct the removal of a director of a corporate trustee, but went on to say that it does possess the inherent jurisdiction in supervising a Bermudian trust to signify that rather than removing the corporate trustee, it would be desirable if one or more of the directors resign.

The Isle of Man courts also dealt with issues around changes of trustees, but in relation to the rights and duties of the outgoing trustees. In Dominion Fiduciary Services (Switzerland) SA v. Montpelier (Trust and Corporate) Services Limited, Dominion applied as the trustee of two trusts against Montpelier, the former trustee, for the transfer of the assets of the trusts and to require it to hand over all documents related to the trust. Dominion argued that Montpelier was under an obligation to vest the assets of the trusts in Dominion as the new trustee. Montpelier did not dispute the obligation in principle, but sought the assistance of the court by way of requiring the parties to agree a deed of retirement and appointment, or failing agreement, for the court to settle a deed. Montpelier's primary stated concerns were outstanding fees and a potential unpaid tax liability of uncertain amount, for which it wanted a specific indemnity.

By the time of the hearing, a deed had already been executed and Montpelier accepted it was no longer the trustee. The court concluded that "there is a duty for former trustees to cooperate and act reasonably during a transfer process" and that it was "a straightforward decision for the court" to require Montpelier to transfer the trust property and documents immediately. It declined the relief sought by Montpelier, observing that Montpelier remained entitled, even after handing over the assets, and even in the absence of an express indemnity, to continuing rights of reimbursement and exoneration as a matter of general law. The court could not impose a deed on the parties or settle one for them: "the die was cast when Montpelier was removed as trustee."

This case provides helpful clarity as to the steps that should be taken by an outgoing trustee in order to comply with its duty to transfer trust assets to the new trustees and how far it can go to protect itself against future claims.

A particularly significant case involving trustees came to the Privy Council on appeal from Guernsey and decided for the first time, two points of public importance relating to trust legislation in Jersey and Guernsey, governing the relationship between trustees and third parties. In Investec Trust (Guernsey) Ltd v. Glenalla Properties Ltd, the Privy Council decided that Article 32 of the Trusts (Jersey) Law 1984, supersedes the English legal principle that a trustee is personally liable for debts properly incurred for the benefit of the trust, with the consequence that the trustee's creditors have no recourse to the trustee's personal estate. However, the Privy Council also decided that Article 32 did not alter the usual rule that a creditor can only access the trust assets by way of the trustee's right of indemnity, which would depend on the individual terms of the trust deed and the state of account between the trustee and the beneficiaries of the trust. In this particular case, the former trustee's personal estate was not exposed to claims for debts incurred by a Jersey law discretionary trust, where the trust's assets did not meet the amount of the debts.

The case also touched upon a key piece of international trusts law. The former trustee of the Jersey law discretionary trust was sued in Guernsey for the debts which were governed by either Guernsey or English law. The court had to decide if the aforementioned Article 32 applied in Guernsey. The Privy Council held that the limitation of a trustee's personal liability under the Jersey and Guernsey trust legislation was a matter of status and should be recognised at common law and given effect. This meant that although Article 32 belonged to the Jersey legislation, it applied to the creditor's claims in the litigation in Guernsey.

Confidentiality of proceedings

In the Matter of a settlement dated 16 December 2009 was a case decided by the Grand Court of the Cayman Islands where a trustee was successful in obtaining an order for the protection of confidentiality in proceedings concerning the trust. These protections included (a) placing only an anonymised version of the court documents on the public file and (b) applications relating to the intended substantive directions application being held in private only.

The court usefully confirmed the availability of confidentiality orders in trust matters in the Cayman Islands and considered the balance between privacy and open justice. It noted that the route to a confidentiality order will normally involve the welfare of minors and/or the protection of the privacy of someone involved in the relevant proceedings.

The court considered the balance between ensuring the protection of the welfare of minor beneficiaries, the private lives of the adult beneficiaries and the trustee's overall ability to exercise its function and decided to grant the confidentiality orders sought. The court did make clear that trustees seeking to obtain such confidentiality orders should ensure that they fulfil their duties of full and frank disclosure. It stated that "The Court is required to act as a judicial watchdog, with one eye on the private needs of locally established trusts and the other eye on the public requirements of open justice. In procedural terms, such applications may properly be commenced following the procedure applicable to interlocutory injunction applications, commenced by interlocutory summons issued in the intended action. That is because the relief sought and granted is in effect an interlocutory injunction."

Jersey's Royal Court also considered issues of confidentiality but, in rather different circumstances, came to a different conclusion. Representation of HSBC Trustee (CI) Limited dealt with the circumstances in which the court will direct publication of a judgment following family trust proceedings which have been heard in private.

The court noted that the usual practice in such cases was to publish an anonymised judgment. However, in this case the family concerned was well-known in Hong Kong, where the media had already published a significant amount of information about the case, and any anonymisation would be pointless. The choice was therefore one of publishing a judgment in full or not at all. The fact that the case did not contain any new point of law was not relevant; much guidance about the court's approach to administrative applications in trust proceedings can be obtained from looking at its approach in practice.

The court considered the factors which would weigh against publication, which are where the case concerns the welfare of minors; where publication would defeat the very object of the proceedings and where the right to privacy outweighs the interests of public justice. It observed that none applied here, and also that in every case there must be a good reason to depart from public justice. It therefore ordered publication of the judgment.

Mistake and rectification

In Guernsey in M v. St Anne's Trustees, M was a beneficiary of a Guernsey law trust. He applied to the Royal Court to set aside transactions by which the trustee had accepted shares in property-owning companies into the trust, which had caused a large tax liability to accrue. The Royal Court's refusal of the application was overturned by the Court of Appeal and the transactions were set aside.

This case is important as in its judgment, the Court of Appeal set out the parameters of the rule in Hastings-Bass and how it operates in Guernsey Previously the law had been in a state of uncertainty as to the precise legal test to be applied and the exact circumstances in which fiduciaries could seek to avoid transactions giving rise to adverse fiscal charges. The Court of Appeal clarified the legal test for the applicability of the rule in Hastings Bass in Guernsey and proceeded on the assumption (without expressly deciding) that Guernsey law is to like effect as the revised approach set out by the UK Supreme Court in Pitt v. Holt and is now the leading authority on the rule in Guernsey. For further details, please see our news update on the case.

The previous case was one of many in recent years relating to mistakes by trustees. B and C v. Virtue Trustees (Switzerland) AG & Others, the C Trust was an example of a case arising out of an alleged mistake by the settlor. In such cases, rather than merely setting aside a transaction, the remedy is an order for rectification of the trust instrument. The Jersey Court of Appeal considered the principles governing the remedy and confirmed that the evidential threshold to convince the court that a trust should be rectified is a high one. The evidence that there has been a mistake that does not reflect the Settlor's true intention must be convincing. Rectification is not to be used as a method of asking the court to re-write the trust instrument to say what the parties wished it did say. Ultimately, the rectification should be no more than is strictly necessary to correct what appears to be the mistake.

The Court of Appeal also confirmed that where a trust is settled unilaterally and an application for rectification is made, the settlor's intention is relevant and so also is the intention of the first trustee. A lack of communication between the settlor and first trustee can potentially result in a mistake.

Court's approval

Trustees in offshore jurisdictions commonly apply, in 'Beddoes' proceedings, for court approval of acts they propose to take. In the Matter of a Settlement known as the Stingray Trust dated 5 July 2005 was a Cayman Islands case where the court had to consider its stance on granting Beddoes relief retrospectively, in this case to enable a trustee to defend concluded proceedings in Switzerland and ongoing proceedings in Milan. The proceedings involved a challenge to the trust by a co-settlor on the basis that the trust was invalid. The Swiss courts had dismissed the challenge, but the Milan proceedings were extant. The court decided to grant the Beddoes relief and allow the trustee to be indemnified for its costs and expenses. In doing so, the court provided guidance as to its approach to Beddoes applications generally. Particularly in relation to retrospective relief, it will only be in exceptional circumstances that a trustee will be indemnified for its costs and expenses if the court has not given prior sanction. The ability of a trustee to obtain retrospective relief will depend on whether the trustee can show that if the trustee had applied for the relief prior to the commencement of proceedings, it would have been granted. The court also confirmed that the court has an exceptional jurisdiction where the dispute involves an attack on the trust's validity.

Representation of Hawksford Jersey Limited, In the Matter of the H Trust provides an example of a case in which Jersey's Royal Court declined to grant an application by a trustee for prior approval of a momentous decision. The court noted that the trustee had entirely failed to identify or acknowledge before the court a significant conflict of interest. Although a conflict of interest would not in itself always result in refusal, the court would give heightened scrutiny to decisions where such a conflict was present. The trustee had also failed to consider the tax consequences of its decision. Further, the beneficiaries were divided as to what they wanted the trustee to do. In these circumstances the court declined to bless the trustee's decision.

Insolvent Trusts

In Representation of Rawlinson & Hunter Trustees SA [2018] JRC 119, the Jersey Court considered the rights of a former trustee in relation to an insolvent trust. Insolvent trusts are a feature of Jersey and Guernsey law because of a provision in each jurisdiction's trust laws to the effect that a trustee is only liable to a third party creditor to the limit of the quantum of the trust fund.

In previous decisions relating to the same case, the court had held that a former trustee of the trust (Equity Trust (Jersey) Limited) was entitled to enforce its contractual indemnity against the trust fund by way of a non-possessory lien over the assets. This lien was sufficient to defeat the interests of the beneficiaries. The question, however, remained as to where such a lien should rank in relation to that of the current trustee, and also to any other third party debts. Equity Trust asserted that the interest which was first in time should take priority, but the court held that this would be both unfair and impractical. It held instead that the former trustee's lien fell to be dealt with on a pari passu basis with that of the current trustee and also any third party creditors.

In subsequent decisions relating to the same matter, the court held the purported removal of a trustee to be invalid because it had not been done in good faith (Representation of Rawlinson & Hunter Trustees SA [2018] JRC 131), and also determined the question of costs arising from the application in relation to the non-possessory lien (Representation of Rawlinson & Hunter Trustees SA [2018] JRC 164).

We have covered in our section on civil procedure two decisions in the Tchenguiz litigation regarding access to, and use of, information filed in court. A further ruling of the Commercial Court in the BVI in the same case was made in 2018 and was upheld by the Court of Appeal in January 2019 during the preparation of this update. In Tchenguiz v. Rawlinson & Hunter Trustee SA, the court applied the test set out in Schmidt v. Rosewood to determine whether Mr Tchenguiz should, as a beneficiary, be able to require the trustee to produce documents relating to the administration of the trust. The trustee had resisted, partly on the basis that Mr Tchenguiz might use the documents for a collateral purpose that would be damaging to the trust. Against undertakings confining the use of the documents to matters relating to the administration of the trust, the court ordered disclosure.

As an aside, the court was also critical of the (Swiss) trustee, given that it had taken on the trusteeship of a BVI trust and thereby submitted to the supervisory jurisdiction of the BVI courts, for putting Mr Tchenguiz to the inconvenience of effecting service of the proceedings via Hague Convention channels and the inherent consequential delay. The judge commented that if it was necessary for the administration of the trust to be brought before the court, it was in the interests of the trust that this should be done quickly and efficiently. So it would not normally be a proper exercise of trustee discretion for it to "seek to avoid or delay coming before the court to answer for its administration of the trust."

In Y v. R, the Grand Court of the Cayman Islands confirmed that a beneficiary of an irrevocable discretionary trust does not have an asset over which it is possible to appoint receivers.

By way of background, in July 2016, Y obtained a foreign arbitral award against R for USD 2 million, which Y then applied to enforce in the Cayman Islands. When Y applied to appoint receivers, the court determined that much of the evidence in support of that application was inadmissible and in breach of Cayman's Confidential Information Disclosure Law. Despite this, the court decided to determine the receivership issue.

The court accepted the arguments of R that discretionary beneficiaries of a trust do not have legal or equitable ownership in the assets of the trust. In fact, the court noted that Y was not able to provide any authority to support the proposition that a beneficiary of an ordinary discretionary trust has a proprietary interest in the trust over, which receivers could be appointed.

Trust Assets

In the BVI case of Gany Holdings PTC v. Khan, the question which went all the way to the Privy Council was whether certain assets (shares in companies) had been settled into a trust. The Privy Council rejected a line of argument that the 1872 English decision in Re Curteis had the result that a rebuttable presumption was to be drawn that property gratuitously transferred to a trustee was to be held by the trustee under the terms of a particular trust. However, the Privy Council decided that the judge below was also wrong to have found that there was no probative evidence – apart from that presumption – of whether the companies were the property of the trust.

In the case of Liang v. RBC Trustees (Guernsey) Limited, the question concerned the interplay between anti-money-laundering legislation and trust assets. Ms Liang was a beneficiary of a Guernsey law trust, the assets of which were frozen as a result of a suspicious activity report made to the Financial Investigatory Unit (FIU). In Guernsey, where a party has a suspicion about the origin of funds, it cannot deal with those funds without the consent of the FIU. The trustee had sought consent from the FIU for the termination of the trust and the distribution of the assets to Ms Liang, but consent was not provided by the FIU. Therefore, Ms Liang brought an application in Guernsey seeking the termination of the trust and the distribution of the assets to her, which was the first private law action of its kind in Guernsey. The presiding judge made a declaration that Ms Liang had discharged her burden in respect of approximately CAD 16.81m of the trust assets.

This case is important as in its judgment, the Royal Court confirmed the test for suspicion in Guernsey and that the evidential burden for proving the source of funds needed to be discharged by the beneficiary.

Consequences of loss of value caused by wrong

In Bidizina Ivanishvili et al v. Credit Suisse Life (Bermuda) Limited, the plaintiffs claimed damages for breach of statutory duties alleged to be contained in the Segregated Accounts Companies Act 2000 and for breach of 'common law duties' in respect of certain investments. The background to the proceeding involved a claim against Credit Suisse Life (Bermuda) Ltd (CS Life) for losses suffered by two unit¬ linked life insurance policies. The policies were issued to the sixth and seventh plaintiffs in 2011 and 2012 respectively. The first to fifth plaintiffs were members of the policyholders' family who were to be the ultimate beneficiaries of the proceeds of the policies, as beneficiaries of trusts within which the policies were held.

CS Life sought to strike out the entirety of the claims made by the family members on the ground that they were not named in the policies, but instead were only discretionary beneficiaries of the trusts, for which the benefit of the policies were held, and as such they had no proprietary interest in the trust's assets unless and until the assets where appointed to them. There was also an application by the plaintiffs to strike out the defence on other grounds.

The Supreme Court held that, in summary, given that the sole point of law advanced by the defendant (i.e. the proposition of law that a diminution in the value of the trust fund caused by the wrongdoing of third party does not cause a discretionary beneficiary any loss) involves controversial issues of developing law, it was best to be decided on the basis of concrete facts at trial and as such, is unsuitable for resolution at a strike out application. We therefore expect to be writing about this case again in a future issue.

Administration of estates

In the BVI in the case of Scherbakova v. Sherbakova et al, the question was whether a grant ad colligenda bona should be made urgently in respect of the deceased's BVI estate, or whether the court should await an appointment in England on a similar application there. The BVI estate was substantial, and formed a large part of the overall estate. The court was not persuaded by the first defendant's submissions that it would be better if a Chancery Master in London dealt with the matter first.

Appleby acted for the applicant in the Dominion v. Montpelier case in the Isle of Man, in Guernsey for the plaintiff beneficiaries in both M v. St Anne's Trustees and Liang v. RBC, for the second defendant in the BVI case Gany v. Khan, for Credit Suisse Life (Bermuda) Ltd in Bidizina Ivanishvili v Credit Suisse, and for the second defendant in the Scherbakova v. Sherbakova case in BVI.

First published as part of In the Courts 2018.

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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Authors
Mark Holligon
Anthony Williams
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