In December 2019 the Guernsey Court of Appeal upheld the judgment of the Guernsey Royal Court in Rusnano Capital AG (in liquidation) v Molard International (PTC) Limited and Pullborough International Corp  GRC 011 in relation to the statutory 'Saunders v Vautier' provisions under the Trusts (Guernsey) Law, 2007 (the "Law") . The position remains therefore that beneficiaries of a discretionary trust can require trustees to terminate a trust and distribute the trust property, even in circumstances where a broad power to add further (unspecified) beneficiaries exists. On the back of that decision the Court of Appeal has now (29 January 2020) handed down its interesting and, in part, novel judgment dealing with the question of the Trustee's costs.
The Case at First Instance
The Respondent was an entity within a wider group structure that invested in the nanotechnology industry, one such investment being shares in an English healthcare technology company (the "Shares"). A trust governed by Guernsey law was established in 2014 onto which the Shares were settled (the "Trust"), with Molard International (PTC) Limited (the "Trustee") as trustee, and Pullborough International Corp (the "Appointor") as 'enforcer' and 'appointor'.
The only beneficiary designated by the Trust instrument was the Respondent, which was named specifically therein. However, the Trust instrument gave the Appointor the power to add persons or classes of persons as beneficiaries (and to exclude classes or members of a class from being beneficiaries). The Appointer had not exercised that power. The Trust instrument also provided that the Trustee was to appoint the trust fund and/or its income to "all or such one or more of the beneficiaries...in such shares...and in such matter generally as the Appointor shall in its absolute discretion from time to time by instrument direct."
The Respondent had applied under section 53 of the Law to require the Trustee to terminate the Trust and distribute its assets. Section 53(3) states:
"Without prejudice to the powers of the Royal Court under subsection (4), and notwithstanding the terms of the trust, where all the beneficiaries are in existence and have been ascertained, and none is a minor or a person under legal disability, they may require the trustees to terminate the trust and distribute the trust property among them."
Findings of the Royal Court
McMahon DB observed that although section 53(3) of the Law could be regarded as a codification of the rule in the English case of Saunders v Vautier (1841) 4 Beav 115, 49 ER 282:
"such codification does not necessarily mean that the principles developed in other jurisdictions as to how to give effect to that rule are applicable under the 2007 Law". The question for the courts in Guernsey is "how to give effect to the statutory regime that operates in Guernsey, using the definitions found in the 2007 Law itself and giving the other words their meanings through applying usual principles of statutory interpretation."
The Deputy Bailiff accordingly interpreted section 53(3) by reference inter alia to section 80 of the Law which defines "beneficiary" as meaning "a person entitled to benefit under a trust or in whose favour a power to distribute trust property may be exercised". In circumstances where the Trust document had designated only the Respondent as a beneficiary, but a power to add beneficiaries to the Trust existed, the Deputy Bailiff therefore found that it was correct to say that, "all the beneficiaries are in existence and have been ascertained." The Deputy Bailiff further relied on the Jersey case of In re Exeter Settlement 2010 JLR 169, in holding that there was a distinction between beneficiaries of a trust and potential objects of a power to add further beneficiaries. Accordingly, it was open to the Respondent as sole named beneficiary to seek the end of the trust as "this [was] not a trust where the class of beneficiary has to be ascertained by reference to any relationship set out within its terms".
The Royal Court considered the implications of the Judgment to so called "Red Cross" or "Black Hole" trusts, in which 'primary' beneficiaries are not included in the trust at the point of its creation, and are instead left to be added at a later date, with a 'default' beneficiary (often the Red Cross) sustaining the structure as the named beneficiary. McMahon DB noted that the Judgment confirms that such default beneficiaries may likely have the power to terminate the trust and claim the trust fund under section 53 of the Law before the 'principal' beneficiaries are added. He rejected the submission that the Court's decision would defeat the terms of may trusts, whether in Guernsey or elsewhere and suggested that, in any event, charities regularly used as 'default' beneficiaries (a) "will not know about the settlor's possible bounty", and (b) may in any case choose not to terminate the trust out of concern that they would subsequently no longer be the preferred charity in such cases: "an immediate windfall may not be a sound longer-term strategy."
The Case on Appeal
The Trustee and the Appointor (together the "Appellants") appealed the Deputy Bailiff's decision. As well as submitting that the Deputy Bailiff had reached the wrong construction of section 53(3), the Appellants also argued that, because section 53(4) conferred an overriding discretion upon the Royal Court to refuse termination even where subsection (3) was applicable, it was incumbent on him to have considered this exercise of discretion where section 53(4) had been prayed in aid.
Court of Appeal's Findings on the SubstantiveIssues
Adopting the Royal Court's reasoning with respect to the meaning of 'beneficiary' under the Law, the Court of Appeal upheld the judgment of the Deputy Bailiff as to the proper construction of section 53(3) of the Law. The Respondent, as sole named beneficiary could therefore seek to terminate the trust. The Court of Appeal observed that where the Law wishes to include not only current beneficiaries but also those who may become beneficiaries in the future, it specifically says so, as is the case in section 52(c) which provides:
"Subject to the terms of the trust...where –
(c) there is no beneficiary and no person who can become a beneficiary in accordance with the terms of the trust"...
the interest or property concerned shall be held by the trustees on trust..."
The Court of Appeal accepted that the Deputy Bailiff's decision might leave "Red Cross" trusts vulnerable to the risk of termination by a named charity under section 53(3), wholly contrary to the settlor's intentions. However, the Court of Appeal was "not necessarily too discouraged" by that effect, questioning whether such trusts are "to be encouraged in an international finance centre such as Guernsey, with a high reputation for upholding international standards". The Court of Appeal further considered that:
(i) the risk could be addressed by the trustees exercising the power of addition at an early stage so as to add further beneficiaries before a charity made any such demand for termination; and
(ii) provided the class of beneficiaries was defined as including issue, there could be no question of the beneficiaries being able to utilise section 53(3) as long as there was any possibility of future issue being born. In any event, the potential consequences did not outweigh what the Court considered to be the proper construction of subsection (3) and that if that construction was ultimately felt not to be appropriate, it would be a matter for the States to amend section 53 accordingly.
Insofar as section 53(4) was concerned, the Court of Appeal held (as was conceded by both parties during the hearing), that that section did (unlike the rule in Saunders v Vautier) confer a discretion upon the Royal Court to override the exercise of section 53(3). Therefore, the Royal Court could refuse the termination of a trust and the distribution of trust property even where the requirements of section 53(3) were satisfied. The Deputy Bailiff had not been asked to consider the point at first instance and the appeal was therefore allowed to the extent of remitting the matter to the Deputy Bailiff to consider the position under subsection (4), which would require, potentially, the hearing of evidence as to the intention of the parties at the time of the establishment of the trust. The Court of Appeal also considered that this would provide an "element of protection against the termination of trusts" in situations, such as a "Red Cross" trust, where termination may not be appropriate.
Of further interest was the Court of Appeal's decision on costs, handed down in January this year which inter alia ordered the majority of the Respondent's costs of the Appeal paid by the Appellants and denied the Trustee's and the Appointor's right to reimburse themselves from the Trust Fund. Key findings from the decision were:
(i) Costs of the appeal – the Appellants were ordered to pay 80% of the Respondent's costs on the recoverable basis. The Court of Appeal held that in principle, the Appellants should pay the costs of their unsuccessful appeal, the Appellants having lost on the sole issue before the Deputy Bailiff as to the proper construction of section 53(3) with a deduction in relation to the subsection (4) point;
(ii) Costs of the hearing before the Deputy Bailiff and the Appellants' application for a stay of execution pending appeal - the Court of Appeal declined to make any order in this regard holding that these were matters for determination by the Deputy Bailiff in due course;
(iii) Reimbursement from the trust fund – the Court of Appeal held that the Appellants were not entitled to reimburse themselves from the trust assets for any of their appeal costs on the basis that they were acting in the interests of Mr Pavel Erochkine ("PE") (a former employee of the Respondent who claimed the trust was intended to be for his benefit and who was also the sole shareholder and director of the Trustee) rather than in the interests of the beneficiary of the Trust;
(iv) Payment on account – the Court of Appeal ordered that the sum of £45,000 (to be taken from the amount held on account as security for costs) be paid on account of costs within 28 days observing "Although, so far as we are aware, this Court has not previously ordered an interim payment in respect of costs, it was common ground...that such jurisdiction exists..."; and
(v) Third Party Costs (both the appeal and the hearing below) – The Respondent beneficiary was granted leave to join PE for the limited purposes of applying for a non-party costs order against him in respect of both the application and the appeal. The Court of Appeal observed that, "Given the background to this appeal...we think it entirely reasonable the Mr Erochkine be joined as a party so that Rusnano may pursue such an application if it thinks fit..."
The substance of the first instance judgment remains unchanged. The Court of Appeal has upheld the important point established by the Royal Court that section 53 of the Law creates an independent statutory mechanism for the termination of trusts by beneficiaries which, whilst derived from the English common law 'rule' in Saunders v Vautier, must be interpreted by its own wording and, without importing into Guernsey law authorities dealing with Saunders v Vautier which are not relevant to that wording. Under Guernsey law therefore (and arguably also in Jersey where section 43(3) of the Trusts (Jersey) Law, 1984 is on substantially similar terms), the existence of a broad power to add unspecified and unidentifiable beneficiaries will not prevent the current beneficiaries of a trust from terminating the trust under section 53 of the Law. The Court of Appeal's finding that section 53(4) of the Law confers upon the Royal Court a discretion to prevent the beneficiary from terminating the trust even where section 53(3) is applicable (itself a key distinction between the Guernsey statute and the English common law 'rule') is likely to be of comfort to settlors worried about their wishes being potentially thwarted by beneficiaries.
In addition to the novel approach taken on the question of the interim payment, the Court's decision is a salutary reminder to trustees not to take a partisan approach as they may find themselves unable to rely upon their right of indemnity from the Trust assets to reimburse themselves. Further, the fact that the Court of Appeal gave the Respondent leave to join PE to the proceedings highlights both the Court of Appeal's and the Royal Court's powers to make third party costs orders where appropriate.
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.