Cayman Islands: When Must A Trustee Apply To Remove A Protector Or When Must A Trustee Bite The Hand That Feeds It?

Last Updated: 2 November 2009
Article by Nicholas Holland

The Issue

Very recently, the Jersey Royal Court stated that in certain very limited circumstances, including those before the court in that instance, a trustee has a duty to apply to court for the removal of a protector of the trust. It is difficult to conceive of any more awkward obligation to place on a trustee. My view is that in the Cayman Islands such an obligation will only arise under a traditional protector trust in very exceptional circumstances where the protector's conflict and conduct are egregious and the beneficiaries are minors or otherwise incompetent. However, I am also of the view that eventually such an obligation will certainly arise and arise much more often in the context of a Cayman STAR trust.

The Enforcer or Protector

By way of brief introduction to the topic, the notion of an "enforcer" or "protector" for a trust is now a commonplace figure in the offshore variants of the trusts world, though the position has received relatively little judicial acceptance onshore. The "protector" was first introduced in legislation in Bermuda under its Trusts (Special Provisions) Act 1989 as a part of an effort to expand the variety of valid non-charitable purpose trusts. The "protector" was the party with the power to enforce the trust. The statutory powers of the "protector" or "enforcer" is different in each offshore jurisdiction but they generally include the power to dismiss, replace or add trustees, the power to veto distributions of capital and veto trustees' decisions to add or remove beneficiaries.

The purpose of the role of the "protector" or "enforcer" has expanded from simply facilitating the expansion of the non-charitable purpose trust to permit the settlor to provide additional checks and balances by either making himself or a trusted friend the "protector" or "enforcer". This was essential to the success of the offshore trust product because many jurisdictions including Cayman require (in the context of certain kinds of trust at least) that at least one of the trustees be a trust company licensed in the offshore jurisdiction and this trustee would be a complete stranger in a foreign land (which location was usually itself an exotic small island or archipelago) as far as the settlor was concerned.

Given the success of the offshore trust, it was sadly inevitable that eventually the "strange" trust company on an exotic island (regulated as these companies generally are) would prove far more reliable than the trusted friend of the settlor.

Representation of Centre Trustees

The facts in Representation of Centre Trustees (CI) Limited [2009] JRC 109 are unusual and the protector's behaviour was particularly egregious. The protector of the VR Trust was a business partner of the prematurely deceased settlor and also the appointer of the VR trust with power to appoint new or additional trustees and new protectors. The protector was also the settlor of a parallel trust, the Africa Trust. The Africa Trust and the VR Trust each owned 50% of Terret Holdings Limited.

Terret Holdings Limited, at the behest of the protector of the VR Trust, distributed the proceeds of the sale some of its assets dramatically unevenly between the two trusts heavily favouring the Africa Trust at the expense of the VR Trust. The protector of VR Trust offered to buy the assets of the VR Trust for the nominal sum of $1 when the assets were valued by Ernst & Young at over $5 million. The protector of the VR Trust claimed entitlement and demanded payment of large sums from the VR Trust assets on behalf of various other entities which was refused by the trustee. The Protector of the VR Trust then appointed an additional trustee, Langtry Trust Company (Channel Islands) Limited, for the purposes of re-evaluating the Protector's claims to payment of the trust assets.

The last move, the appointment of the new trustee quickly backfired as they sided with the existing trustee's position. The trustees applied for the removal of the protector. The Protector remained in office right up until the hearing of the application for his removal. Most importantly, the trust deed provided that the power to appoint a protector lay with the appointer or failing the appointer in the trustees.

Three Obligations When a Protector is in Conflict with the Trust

The Court set out three principal obligations arising from a protector with a conflict of interest (two of which were on the protector himself and one of which was on the trustee).

  1. The protector is obliged to disclose the conflicting interest to the trustee and in the case of a fixed trust to the beneficiaries or in the case of a discretionary trust to the principal beneficiaries if practicable.
  2. The protector is also required to resign unless (1) it is in the interests of the beneficiaries for him to remain and (2) he reasonably and honestly believes that he can discharge his duties in the interests of the beneficiaries.
  3. The trustee has a "duty" to apply for the protector's removal where the protector has failed to comply with the protector's obligation in B.

It is the last obligation on the trustee that is so tricky. Certainly, the trustees in this instance did a very brave and right thing and they could not reasonably be criticized for bringing the application for the removal of the protector but a "duty" to do so is another matter. Why place this obligation on the trustee? The protector will typically have the power to replace the trustee and so the trustee is to some extent beholden to the protector. The beneficiaries would have authority to bring such an application and this instance were all of age.

Where Angels Fear to Tread

Perhaps the Court understandably wished to immunize the trustees (both Centre and Langtry) from complaint or criticism, and retroactively placing a duty on the trustees to behave as they had done would certainly ensure that no commercial harm came to them. The decision purports to level the trustees' playing field at the high threshold of these trustees' very laudable conduct.

However, creating an obligation on the trustees to behave with such courage may go too far. The protector is there to monitor the trustee not vice versa. The trustees had done their job to date and had successfully prevented every predatory effort by the protector against the trust property. This profoundly conflicted protector caused the trustees grief and great inconvenience and his removal was of benefit to the beneficiaries but was there actually an equitable obligation on the part of the trustees to apply to have the protector removed in the face of inaction by the beneficiaries? Are the beneficiaries truly entitled to sit back, watch this sort of predatory conduct on behalf of the protector, wait for the trustee to commence proceedings and, if the trustee fails to do so, the beneficiaries can then sue the trustee for breach of trust?

Had the trustees informed the beneficiaries of the protector's damaging behaviour and done nothing more, would that not be enough? One of the trustees' concerns in the Centre Trustees' matter was that the protector was interfering with their communications with the beneficiaries and that they were essentially being prevented from clearly communicating their concerns. If the trustees were able to communicate clearly with the beneficiaries then simply communicating their concerns may have fulfilled their fiduciary obligations. However, the decision cannot be isolated on this ground because the Court dismissed this allegation as unproven and proceeded on the ground that the beneficiaries simply had no interest in hearing anything from the trustees.

The Jersey Royal Court clearly answered, albeit in obiter dicta, that it was not enough for the trustees simply to do their utmost to inform the beneficiaries of their concerns. Was it right to do so? This very much reminds me of the Chief Justice of Australia's purported statement regarding recent developments in equity in Canada: "There are three kinds of Canadians: Canadians who owe fiduciary duties, Canadians to whom fiduciary duties are owed and Canadian judges creating new fiduciary duties every day." That is obviously good humoured criticism but it is criticism none the less. Criticism which correctly underlines that fiduciary obligations are rather like bonsai trees, their responsible growth requires frequent pruning.

On the one hand, an obligation to take steps to remove the protector may be implicit in the trust deed's grant to the trustee of the right to appoint a replacement protector where there is no protector fit and capable to perform the role. However, I cannot make this suggestion without pointing out that it seriously strains the language in most trust deeds (including the one in issue in Centre Trustees) likely past the breaking point. Generally, the grant is quite clearly intended to permit the Trustee to fill a vacancy rather than replace an existing protector.

On the other hand, the protector's role is to protect the interests of the beneficiaries from the unwanted actions of the trustees. If adult, competent beneficiaries have been informed of the trustees' concerns is it not misplaced to put an obligation on the trustees to go further and seek to have the protector removed?

Conclusion - A Traditional Protector Trust in Cayman

My own view is that Royal Court's finding that the trustees were under a duty to seek the removal of the protector turns on the case's extraordinarily egregious facts and the Court's desire to protect the trustees from any negative commercial impact from their obviously correct, morally upstanding and brave decision to take the steps they did. However, when the issue is plainly before the Court (rather than a matter of obiter dicta) and the trustees have informed adult, competent beneficiaries of their concerns regarding the protector but the trustees have not applied for the removal of the protector, the Courts will likely find that no such duty exists either under the Trust Deed or generally at equity. Only time and ultimately the Courts will tell if I am right. In the meantime however, trustees would do well to be on the look out and seek legal advice on any conflict of interest between the protector and the interests of the trust.

Obviously, where the beneficiaries are minors or otherwise incompetent, this changes things markedly. Here, in these limited circumstances, the trustees, even of an ordinary trust, will find that the obligations raised by the Centre Trustees decision will find fertile ground in Cayman.

Conclusion - A Star Trust

When the issue arises in the context of a Cayman Special Trusts – Alternative Regime trust ("STAR trust"), the institutional competence of the various interested parties changes markedly and this will affect the trustee's obligation to apply to remove the enforcer. In the STAR trust regime, only the trustee has standing to appoint an enforcer and certainly no beneficiary has such standing. The only one competent to challenge the enforcer is the trustee and so he presumably must rise to the occasion.

Indeed under the Cayman Islands Trusts Law (2007 Revision) the trustee is clearly granted the power and the obligation to apply to court for the appointment of an enforcer. Section 100(4) provides that: "(b) if an enforcer with a duty to enforce is unable, unwilling or unfit to do so" or "(c) if there is no enforcer who is of full capacity and who – (i) is a beneficiary; or (ii) has a duty to enforce and is fit and willing to do so" and with respect to subsection (c) it is an offence for the trustee not to do so. Under section 101 (2) "Subject to evidence of a contrary intention, an enforcer is deemed to have a fiduciary duty to act responsibly with a view to the proper execution of the trust" and (3) "A trustee or another enforcer, or any person expressly authorised by the terms of the special trust has standing to bring an action for the enforcement of the duty, if any, of an enforcer."

In some ways, this brings to the forefront one of the central objections to the STAR trust regime. If the beneficiaries have no standing to enforce any rights against the trustees or enforcers, is there really a trust at all? It is true that an unenforceable right is not a right at all and that an obligation which cannot be enforced is nothing more (or less!) than a moral obligation and not a legal or equitable obligation. It is also true that the idea of a third party protecting or enforcing our legal or equitable rights rather than the possessor of the right may at first blush seem counterintuitive. However, looks can be deceiving. This notion is commonplace in our law. Parents, guardians and attorneys fulfill this role throughout the common law world.

What is troublesome in this context though is that there is no need for an object, or no need for a certain object at any rate, for a Cayman STAR trust. There is only the enforcer and his or her requirements. Arguably, it is impossible for the enforcer under a Cayman STAR trust to be in a conflict as there is no trust object with which his or her interests might conflict.

However, this all sounds remarkably academic and a little too neat. If the enforcer's actions were clearly conflicted with the trust "objects" and the enforcer was pillaging the trust assets for their own benefit, a subsequent enforcer might well look to the trustees for compensation for the trust for doing nothing but blindly obeying the will of the prior enforcer. This is a risk that all trustees would do well to bear in mind.

When must the trustee act and apply to remove the enforcer? Commercially, the trustee will be very reluctant to do so, as amongst other things the enforcers have the power of appointment and replacement of the trustees. However, as the trustee is the only party with the standing to remove a predatory enforcer, it is here that the Royal Court's view will no doubt be incorporated into Cayman law when the case arises. The trustee cannot merely advise the beneficiaries that the enforcer is in a conflict with the trust but it must act.

If the trustee has any doubts regarding whether the enforcer is conflicted with the trust, it would do very well to seek legal advice on the matter promptly. Taking solace in the solipsistic argument that the enforcer can do no wrong may well come to haunt the naďve trustee.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Nicholas Holland
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.