In the Matter of the C Trust [2012] JRC 086B

The Royal Court set aside an instrument of appointment excluding beneficiaries from a trust in a trust and divorce context as being a decision which no reasonable trustee could have taken.

Facts

Two minor children (aged seven and five and known as A and B) applied, through their guardian ad litem, Advocate Mark Temple, to set aside a trust instrument of appointment dated 5 November 2010 (the "instrument of appointment"). The instrument of appointment was executed in relation to a trust known as the C Trust ("the Trust") established in 1993.

At the time of establishment of the Trust,  the Settlor was married to E ("the Widow"). The Settlor and Widow had one living son ("the Father"). During the Settlor's lifetime, the father had married H ("the Mother"), who was born in Peru to a Peruvian father and a Scottish mother. A and B were the children of the Father and the Mother and the grandchildren of the Settlor and the Widow ("the Grandchildren"). Only one of the Grandchildren had been born before the Settlor's death.

The Trust was discretionary in nature and the relevant beneficiaries were the Settlor, the Widow, the Father and the Grandchildren. The Wife was not a beneficiary. The Trust was administered by a corporate regulated trustee, Verite Trust Company Limited, the managing director of which was also the Protector of the Trust.

The Settlor executed a number of letters of wishes, the last only a few months prior to his death in June 2004. The final letter, whilst recognising the non-binding nature of the letter, made clear that the Trust was primarily for the Widow's benefit and requested a specified division (between the Father and the Grandchildren) of the remaining trust fund after the Widow's death.

In January 2007, the marriage between the Father and the Mother broke down and the Mother returned to Peru, taking the Grandchildren with her. In late 2008, the Father commenced divorce proceedings in the Family Division of the High Court of Justice of England and Wales and, in March 2009, the Mother commenced ancillary relief proceedings against the Father.

The existence of the Trust was a live issue in the ancillary relief proceedings, as it was argued that the Trust was a real financial resource of the Father. During these proceedings, the Widow was set against any assistance being given by the Trustee to either the Father or the Grandchildren. The Trustee took advice from English and Jersey lawyers in relation to the Wife's requests for assistance from the Trustee on behalf of the Grandchildren but did not apply for directions from the Royal Court under Article 51 of the Trusts (Jersey) Law 1984 as amended.

The Trustee's Jersey lawyers wrote to H's English lawyers very shortly before a final hearing in the English High Court in July 2010 to confirm that the Trustee had resolved to make available to H £295,000 by way of loan to compromise the divorce proceedings between H and W on a full and final settlement basis.

The High Court in July 2010 ordered H to pay W £2,500 per month in respect of A and B's income needs and there was an agreed lump sum order of £295,000 payable to W by H for the purchase of a flat in Lima, plus a car and membership of a country club. The High Court's judgment and order clearly envisaged that the trustee would assist H in meeting the lump sum payment and on-going maintenance obligations to W in respect of A and B.

The lump sum was paid to W after a delay but the monthly maintenance payments subsequently were not paid by H. Only subsequently was it discovered that A, B and H had all been irrevocably removed by the Trustee as beneficiaries of the Trust for the lifetime of E, the widow. Further, H had sold the matrimonial home so that he had no assets against which W could enforce the High Court's order. The Grandchildren therefore commenced the proceedings via their Guardian ad litem, Advocate Mark Temple, to set aside the instrument of appointment by which they had been removed.

The parties' positions

In summary, the Grandchildren argued that the decision to execute the instrument of appointment was perverse, ie no trustee acting rationally could have reached the same decision.

The Trustee and the Protector aligned themselves with the Widow. They maintained that the Trustee had carefully considered the requests for assistance from both the Mother and the Father and had come to a reasonable decision, in proper exercise of its discretionary powers. They placed heavy reliance on the letter of wishes from which, they submitted, it was clear that it was the Settlor's wish that the Widow should be the principal beneficiary. They maintained that, in light of the Widow's concerns as to her income needs, steps had to be taken to safeguard the Trust. The Trustee maintained that it was for the Mother and the Father to assume financial responsibility for the Grandchildren and that it would be a bold decision on the part of the Court to hold that the decision of the Trustee (which had acted on legal advice) was perverse.

The Law

The onus was on the Grandchildren (acting through their guardian ad litem), as representors, to show that the discretion of the trustee had been improperly exercised. This is an extremely difficult task not least because the raison d'etre of a trust is that the Settlor has entrusted individuals other than the court, ie the trustees, with the discretionary power. It was insufficient to show merely that the court would have acted differently; rather the Court would only intervene where the trustee had acted perversely (In the matter of the H Trust [2007] JLR 569). In other words, it must be shown that the decision was such that no rational trustee would have taken.

Decision

The Court held that the decision to execute the instrument of appointment was one at which no reasonable trustee could have arrived. In so deciding, the Court noted that:

  1. a power of exclusion is, in effect, a power of amendment of a special kind (Lewin, paragraph 30-45). Such a power should be exercised sparingly and in exceptional circumstances;
  2. the Settlor was careful not to seek to fetter the Trustee's discretion and the letter of wishes served only to give general guidance to the Trustees. His primary concern was for the satisfaction of the Widow's reasonable needs but he did not suggest that, subject to her reasonable needs being met, no assistance could be given to the other beneficiaries during the Widow's lifetime;
  3. the Trustee had become so unduly influenced or poisoned by the Widow's invective that they had never independently considered the circumstances of the Grandchildren as beneficiaries of the Trust. Rather, they became unable to differentiate between the Grandchildren and the Mother, the latter of whom they saw as a hostile  party who was threatening to attack the Trust. As a result of this inherent distrust of the Mother, the Trustee had not contemplated any distributions to the Grandchildren in case they benefited the Mother in any way. In the circumstances, this was unreasonable.
  4. it found that there was a plan between the Trustee, the Widow and the Father to exclude the Grandchildren and the Father which was not disclosed to the Family Division of the High Court of England & Wales.
  5. the guidance in the settlor's letters of wishes can only have been of a general nature. He cannot have anticipated all of the circumstances that might arise but in any event he did regard the welfare of the grandchildren A and B as important.
  6. as regards the fact that the Trustee took legal advice the Court commented:

"we appreciate the very considerable hurdle created by the engagement of experienced lawyers to advise on the matter, in particular where those lawyers have expressed the view that the decision was reasonable. In doing so they necessarily reflected the instructions they had received, instructions which in our view would have been tainted by the invective to which we have referred. However, our task is to consider and objectively assess the decision and much as we respect the view of the trustee's lawyers, ultimately those views are not determinative."

The Court therefore set aside the instrument of appointment.

Post-judgment developments

i. Anonymisation proceedings – Re C Trust 2012 JRC 098

The main proceedings were hostile in nature and fell fairly and squarely within the fourth category set out in Re S Settlement [2001]  JLR N 37. As such, they had been heard and determined in open court. There was no pre- trial application for the matter to be heard in private and, for that reason, the judgment was handed down in public on 25 April 2012.

When judgment was handed down, applications were made on behalf of the Widow, the Trustee and the Protector for the judgment to be either not published at all or be heavily redacted. It was common ground between the parties that the judgment would require the usual anonymisation to protect the Grandchildren.

It is easy to see why such applications were made, given the criticism which the Court had leveled at the Widow, the father, the Trustee and the Protector in the judgment. The applicants maintained that saving face was not the rationale for the applications but that:

  1. it would be wrong for the mother to use confidential information in relation to the Trust, in any future application in the ancillary relief proceedings, to which she would not have had access but for this trial;
  2. the confidentiality of private trusts and the privacy of the parties should be protected.

In particular, there was said to be a fear that the Mother might show the judgment to the Grandchildren in the future and further damage relations between them and the Widow. It was submitted on behalf of the Widow that any public interest in publishing the judgment was outweighed by the interests of the Grandchildren.

The Court expressed a hope that the mother would act sensibly and in the best interests of her children, in relation to the disclosure of the judgment to the Grandchildren. However, the Court was not about to fetter parental responsibility by withholding the judgment from them and the public for that reason.

As for the other concerns, the Mother initiated the proceedings and attended the hearing. As a result of these matters, she was already privy to confidential information, thereby rendering any order restraining publication as somewhat otiose. The Court further clarified that, while confidential information is now in the public domain, this was inevitable given that these proceedings were conducted in open court. To redact this information from the judgment would, the Court held, deprive the judgment of any meaning.

The Court was particularly unimpressed by submission (i) above, in that the Royal Court has previously stressed the importance of the Family Division in England basing any decision it makes upon the true financial position of the parties. The obvious implication of this is that it should make no difference whether the judgment is private or public because, in any application to vary maintenance, the trustee should give the fullest information possible to the parties and Family Division in any event.

ii. Costs hearing

In a costs judgment handed down on 1 October 2012, the Trustee (and Protector) was deprived of its indemnity from the trust fund and was ordered to personally pay the costs  of the Grandchildren of and incidental to the proceedings on the indemnity basis.

This decision was based upon the unreasonableness of the Trustee's decision, which is the appropriate test in the circumstances (see ELO and R Trusts [2008] JRC 150). It was held that this was a beneficiaries' dispute which is regarded as ordinary hostile litigation in which costs follow the event and do not come out of the trust estate. As to costs being paid on the indemnity basis, the Court justified this by stating that "here the degree of unreasonableness was high".

The Court held that the Widow and the Father should bear their own costs, in line with the general principle that the costs of this litigation should not come out of the trust fund. It reiterated that "the Court found that it was the widow's invective that infected the Trustee's thinking…the plan to exclude the grandchildren had been formulated and shared with the father". The Court expressly extended these orders to the costs incurred in the anonymisation and costs hearings. It also made an order for an interim payment in the Grandchildren's favour, subject to further arguments on quantum and timescales for payment.

Comment

Interestingly, the Court noted the traditional Jersey customary law duty of persons in position of trustee for a minor to act "bon père de famille" (literally translated as a  good father of the family). It considered that the requirement to act bon père de famille was paternalistic in nature and that, although the requirement had not been expressly incorporated into Jersey's statutory law concerning trusts (as it has been in Guernsey), the statute is not a codification of laws concerning trusts and Jersey law has previously recognised the paternalistic nature of trustees' powers in Re Esteem Settlement [2001] JLR 7, paragraph 38. The Royal Court commented that "it seemed to us inconceivable that any good father would cut these young children out in this way".

The judgment reads as a cautionary tale for trustees in a number of respects. It highlights that trustees of discretionary trusts should not rely too heavily on letters of wishes in exercising their discretion and, likewise, should refrain from straining to impose an interpretation on such letters which coincide with the views of the beneficiary who is exerting the most pressure.

Additionally, this decision reaffirms that the Court will not readily protect a Trustee who has made an unreasonable decision, whether by allowing them their costs indemnity or by protecting their professional reputation by the anonymisation or redaction of the judgment