A recent decision of the Cayman Islands ('Cayman') Grand Court ('Court') considered how to balance the competing interests of a trust which partly owned an asset and a claimant looking to enforce judgment against that asset. It also reviewed if and when a claimant could appear or make representations when trustees applied for a 'Beddoe' Order to indemnify the trustee against all and any costs and expenses which it might properly incur in the process.

In the Matter of the Trusts Law (2011 Revision) and In the Matter of the Grand Court Rules Order 85 Rule 2

Why ask the Court?

Under s.48 of the Trusts Law (2011) trustees can apply to the Court for an opinion, advice or direction on the management of trust money. So long as the trustees have not concealed matters from the court when they made their application, once the Court has sanctioned a course of action the trustee is protected against personal liability to the beneficiaries.

Do trustees need permission to defend their trust?

No. However trustees have been advised to apply to the court to sanction getting involved in litigation on behalf of their trust since the 1893 England and Wales Court of Appeal decision in In re Beddoe, Downes v Cottam [1893] 1 Ch 547 (CA) . The principle explained in that case was that:

"a trustee who, without the sanction of the Court, commences anaction or defends an action, unsuccessfully, does so at his own risk as regards the costs, even if he acts on counsel's opinion..."

To avoid the risk of personal liability for the costs of proceedings on behalf of the trust, trustees will apply for directions from the Court to sanction their involvement in Court proceedings (a 'Beddoes Order').

How do they do that?

This happens in a separate, discrete application unrelated to the main action usually heard by a different judge to the main proceedings. This is because the process of assessing who should be liable to pay the costs of proceedings involves the trustees making full disclosure of the strength and weaknesses of their case and of all other relevant information.

Do they have to tell the beneficiaries first?

Where trustees make an application for directions under s.48, notice of the application has to be served on all persons interested in the application (or as many as the Court decides is expedient) or they have to attend the hearing.

What happened here?

One of the beneficiaries ('Z') of a trust ('Trust') made claims and brought proceedings in England against the Trust and other parties arising out of a Sale and Purchase Agreement. The assets of the Trust were an interest in monies against which Z would look to enforce any judgment in its favour. In defending the proceedings the trustees ('Trustees') would incur costs which, if paid for out of the Trust's funds, would reduce the amount of money against which Z could enforce its judgment. If the Trustees did not defend the proceedings there was a risk there would be no realisable assets left in the Trust.

What did the Trustees do?

They asked for directions as to whether they could defend the English action and permission to borrow funds on behalf of the Trust to pay the costs, and for an indemnity that those costs would be reimbursed from assets of the Trust. Notice of the application was served on Z through Cayman lawyers, and on the Cayman Attorney General on behalf of one of the other beneficiaries of the Trust.

What did Z say about that?

Z applied to be included at the hearing or at least make written representations, relying on a decision in Re:Eaton. It also argued that this was a trust dispute and the Trustees application had the effect of being a pre-emptive costs order. Were Z to succeed the Trust assets would be depleted by the costs of defending the claim. Z's claim was for more than the value of the Trust assets, so depleting them further meant Z was effectively paying its opponent's costs.

What did the Court think of that?

The Judge thought the arguments were misconceived. The Trustees were entitled to make their application which was separate from the English proceedings and would not affect them. He distinguished the circumstances here from Re: Eaton where a beneficiary was claiming against trustees over assets in the trust to which the beneficiary was entitled. In this case Z did not assert ownership of assets in the Trust but was a third party with a potential, disputed, personal claim in contract or tort against the Trustee and others.

Is that fair to Z?

The Judge considered that a contingent creditor in Z's position should be allowed to make representations on whether the Court should give a direction to defend, but that did not mean the Court had to follow them. The Court had then to weigh the relative merits. In this case:

  1. If the Trustees did not defend the claim Z would be entitled to a default judgment. As the claim exceeds the Trust assets these would be exhausted to the detriment of the beneficiaries who claim ownership of them.
  2. Were Z successful the defence costs would reduce the assets against which Z could enforce its judgment. Z did not assert ownership of those assets, but a contingent interest in them should its claim succeed.

On balance the Court decided that a potential judgment creditor takes the trust assets as it finds them at the time of judgment and the interests of the beneficiaries with claims to own those assets takes priority.

What did the Court Order?

Given the threat of a default judgment if the Trustees did not defend the English proceedings, the judge directed the Trustees to defend them, with an indemnity from the Trust assets (to be funded by a loan) for the costs reasonably incurred in defending.

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.