When can a Protector expect to be indemnified from trust property for the costs of acting in the role? And what should a trustee do when faced with a demand by a Protector for payment from the trust? Both the Isle of Man and Jersey courts have recently considered the office of Protector, and the Protector's right to indemnity. They provide an interesting contrast to one another and add to the growing understanding of the position of a Protector.

IFG International Trust Company Limited and others v French (2012) CHP 2012/0048

This Manx case sprang from the USA Securities and Exchange Commission (SEC)'s investigation into the affairs of two brothers ("the brothers"), who had settled trusts in the Isle of Man and engaged Manx trustees. F, an individual, had been a protector for the trusts. He became embroiled in the SEC litigation and claimed that the trusts should indemnify him for the costs of his defence. The trustees asked the court for directions as to their response.

There were broadly two forms of express indemnity among the trust deeds:

  • the first gave the trustee power to grant an indemnity "upon such terms as the Trustee may think fit".
  • The second conferred an automatic right of indemnity on the Protector "for any liability loss or expense ... recovered against and paid by such person other than liability loss expense or judgment arising out of his own wilful and individual fraud or dishonesty".

The trustees pointed out that:

  1. Most of the claims against F did not concern his actions as Protector, but in other roles such as attorney to the brothers.
  2. No claims had been made against any other Protectors of the trusts.
  3. They felt unable to exercise their discretionary power of indemnity while substantive allegations against F remained undetermined.
  4. The automatic rights to indemnity applied only in cases of honest activity, which remained undetermined.

F countered that:

  1. The right to an indemnity extended to third party disputes such as here, where it was in the interest of the trusts to defend them against an allegation that they were shams.
  2. He had an implied right of indemnity anyway.
  3. Allegations of fraud were entirely unproven.

The Deemster decided that:

  • The court would not interfere with the trustees' discretion where their conduct was informed, bona fide and uninfluenced by improper motives.
  • There was no need for F to defend the trusts from sham allegations as the brothers were themselves defending these allegations.
  • The trustees were entitled to form a view that the claims against F were not purely tied up with his being Protector.
  • It was not for the trustees or the court to determine whether the claim of fraud against F was valid or not: the trustees were entitled to await the decision of the New York court.

The Deemster dismissed the possibility of an implied indemnity, but it is suggested that the decision of the Jersey court (below) is to be preferred as regards the general principle.

The Deemster also suggested that a Protector's role was probably to look after the interests of the beneficial objects, with duties that go beyond the pure words of the settlement deed. This may go a little far: it is suggested that, in the absence of any statutory role for a Protector under Manx law, little can be deduced from the title "Protector" itself: the only way to determine the extent of the Protector's role is to ascertain the extent of the Protector's role based on the wording of the settlement deed.

Helpfully, the Jersey court has followed with its own judgment, confirming a wider principle of an implied indemnity:

B v Royal Bank of Canada and E, In the Matter of the HHH Employee Trust and in the Matter of the B Sub-Trust [2013] JRC 023 Royal Court of Jersey

Although this case concerns a settlor rather than Protector entitled as such, the same principles apply as it concerns the position of indemnities available to a person with fiduciary powers. Here, the settlor company had been discharged as a defendant to proceedings concerning the trust. It sought an indemnity from the trust for its costs. The trustee claimed that the settlor's fiduciary functions did not include steps in the proceedings, such as disclosure, and that defending the litigation went beyond the scope of exercising its fiduciary functions.

The court said that the key point was "that the settlor was actioned in its capacity as a fiduciary and it was as a fiduciary that it raised before the court the issue of the extent of its obligations. It therefore incurred these costs in the discharge of its fiduciary functions. It would be wrong... for the settlor to have to pay any part of the costs it has incurred as a fiduciary out its personal assets."

The court therefore held that the settlor should be indemnified from the trust fund on the trustee basis. This wider entitlement to an implied indemnity for a Protector (or other person exercising a fiduciary function) seems more in accordance with principle than the Manx case.

What Should Trustees and Protectors Do Where the Protector Seeks Indemnity from Trust Property?

  • Check the terms of any express right of indemnity
  • Identify the scope of the Protector's role, and whether it is fiduciary in nature (exercisable for the benefit of beneficiaries rather than the Protector personally)
  • Identify whether the Protector's role implies a right of indemnity from trust property
  • Ascertain whether the actions concerned are within the scope of the Protector's role
  • Protectors: consider whether you have a right of indemnity, and the possibility of court approval before taking the action concerned
  • Trustees: consider whether the Protector must or may be indemnified, and whether to seek the court's directions before indemnifying the protector from trust property

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.