In the matter of the Representation of Centre Trustees (C.I.) Limited and Langtry Trust Company (Channel Islands) Limited JRC109
This decision of the Royal Court in Jersey is of interest for its consideration of the duties of a protector who finds himself in a position of conflict.
In outline, the factual background was as follows:
- Mr Pabst (the "Protector") and Mr Van Rooyen established a Jersey incorporated company Terret Holdings Limited ("Terret"), as a vehicle through which a South African mining venture would be conducted. Terret was owned as to 50 per cent by a trust settled by Mr van Rooyen (the "VR Family Trust") and as to 50 per cent by a trust settled by the Protector (the "Africa Trust"). The Protector also established another settlement, the "Global Trust", which owned a company called Grenache Holdings Limited ("Grenache").
- Centre Trustees (C.I.) Limited ( the "Trustee") was the trustee of all three settlements and administered Terret and Grenache until 2007 when Trustcorp Services Limited ("Trustcorp") became the trustee of the Africa Trust and the Global Trust and took over the administration of the two companies.
- The Protector was appointed as protector and appointor of the VR Family Trust and Mr van Rooyen was appointed as protector of the Africa Trust.
- The VR Family Trust was a discretionary trust, the beneficiaries of which comprised Mr van Rooyen, his wife and two children (the "Children"). The Children were the only living beneficiaries as Mr van Rooyen and his wife were killed in an accident in 2000. Certain powers of the Trustee required the prior or simultaneous written consent of the protector and the appointor was empowered to appoint new or additional trustees and new protectors.
- In 2002, certain interests in an underlying company (the "Underlying Company") were sold. Terret owned 70 per cent of the Underlying Company. The Africa Trust and the VR Family Trust stood to share equally in the proceeds of sale. However, this did not occur and the VR Family Trust received only a small share of the proceeds.
- In 2004, the Protector made an offer to the Trustee on behalf of the Africa Trust to purchase its shareholding in Terret for US$1. At the time, Terret owned 100 per cent (less one share) of another mining company ("AMCompany"). The Trustee made enquiries as a result of which it was advised that Terret was worth in the region of £3.1 million. In consequence of these enquiries being made, the Protector withdrew his offer.
- In 2006, the Protector made a number of unsupported demands (the "Claims") as follows:
- from Terret to the Trustee (as trustee of the VR Family Trust) demanding repayment of its share of the proceeds of the Underlying Company together with interest;
- from Grenache to Terret demanding repayment of various purported loans; and
- in his capacity as a beneficiary of the Africa Trust to the Trustee as trustee of the VR Family Trust and the Africa Trust and to the directors of Terret, requesting that arrangements be made by the trustee of the VR Family Trust to repay funds previously advanced to it with interest so as to allow Terret to meet its obligations to Grenache.
- In 2007, the Protector, without notice to the Trustee, used his powers as appointor to appoint an additional trustee of the VR Family Trust (such trustee and the Trustee are together referred to as the "Co-Trustees of the VR Family Trust"). It was accepted that one of the reasons for this appointment was to have the Claims reviewed by a new trustee appointed by the Protector.
- The Protector's lawyer subsequently provided the Co-Trustees of the VR Family Trust with a statement of the Claims, alleging that the transfer of funds from Terret to the VR Family Trust following the sale of the Underlying Company was a holding device or loan i.e. not a final distribution or dividend. The Co-Trustees of the VR Family Trust rejected the Claims.
- Following the transfer of the administration of Terret from the Trustee to Trustcorp, Terret's directors were the Protector and certain officers of Trustcorp. Within two months, the new directors had sold Terret's main asset, being its interest in AMCompany, for US$1 to a company wholly owned by the Africa Trust. The sale was made without notice to the Co-Trustees of the VR Family Trust which owned 50 per cent of Terret.
- In summary, it was claimed that the Protector was involved in:
- the inequitable distribution of the proceeds of sale of the Underlying Company to the disadvantage of the VR Family Trust;
- an offer by the Africa Trust to purchase the VR Family Trust's interest in Terret at a substantial undervalue;
- Terret demanding repayment from the VR Family Trust of its share of the proceeds of sale of the Underlying Company;
- appointing an additional trustee of the VR Family Trust for reasons, at least in part, to advance the Claims; and
- the sale of AMCompany for US$1 to a company owned by the Africa Trust.
Conflict of Interest
In 2007, lawyers for the Trustee suggested that, in the circumstances, the powers of the Protector should be suspended. This suggestion was not accepted by the Protector's lawyers. In 2008, the Co-Trustees of the VR Family Trust applied to court for the removal of the Protector, as both protector and appointor. The Protector did not resign as protector, although he expressed himself willing to do so, and considered that any potential conflict of interest had been addressed by his agreement not to exercise any of the Protector's powers with regard to the Claims. However, at the hearing, the Protector did not oppose his removal. The Trustee sought the costs of and incidental to the representation against the Protector on the indemnity basis, arguing that his conduct constituted a special or unusual feature justifying such an award.
Duties of Protector and Appointor
The court referred to the classification (see Lewin on Trusts, 18th edition) of dispositive and administrative powers into beneficial, limited and fiduciary powers as follows:
- beneficial powers may be exercised in any way for the purposes or benefit of the donee, as the donee wishes and without restriction;
- limited powers must be exercised in good faith for the purposes for which they were given: they differ from beneficial powers as they are conferred for the benefit of the beneficiaries and not the donee; and
- fiduciary powers are a class of limited powers: the donee of a fiduciary power owes a duty to the objects of the power to consider from time to time whether and how to exercise it (and the objects of the power have various remedies open to them if the donee does not or cannot do so).
In this case, the powers of the protector were at least limited powers i.e. conferred for the benefit of the beneficiaries and not for the Protector.
The court considered that the guidance (see Hart J in Public Trustee v Cooper [ 2001] WTLR 901) relating to the management of conflict by trustees was helpful but not in all respects directly applicable to the position of those other than trustees (such as a protector) with limited or fiduciary powers within pursuant to a trust who have a private interest or competing duty. The court considered that the first step for a protector, as soon as a conflict came to light, was
to disclose the conflict to the trustee, and also to the beneficiaries of a fixed trust and to the principal beneficiaries (where practicable) of a discretionary trust.
The management of a conflict by a protector will depend upon the powers that he has and upon the nature of the conflict:
- He may be able to remain in office if that is in the interests of the beneficiaries and if the protector honestly and reasonably believes that he can continue to discharge his duties in their interests. Where a protector continues in such circumstances, like trustees, he will run the risk of having to justify the exercise of his owners in hostile litigation and of having to satisfy a court that any decision taken was not influenced by conflict.
- If the protector is unable to proceed as above, his duty is to resign and, if he does not do so, the trustee should apply to court for his removal.
In this case, the Protector was actively pursuing the Claims against the assets of the VR Family Trust. The court held that it could not "envisage a conflict more pervasive" and that it could not "envisage any circumstances in which anyone in his position could reasonably contemplate remaining in office." The court considered that the Protector was under a duty to resign from the moment it was contemplated that claims would be made against the VR Family Trust in which he had an interest.
With regard to the Protector's role as appointor of the VR Family Trust, it was noted that the power to appoint a new protector vested in the appointor and that the Protector's position of conflict would have prevented him from exercising this power without the approval of the Co-Trustees of the VR Family Trust and the Children. Further, as there was no provision within the VR Family Trust for the resignation of the appointor, the court considered that the Protector should have acknowledged that he needed to resign because of his conflict and that he would co-operate with the Co-Trustees of the VR Family Trust in the appointment of a new appointor and in an application of the court in that regard.
With regard to costs, the court considered that the Protector's conduct was "wholly unreasonable and in flagrant breach of his duty as Protector and Appointor." Accordingly, noting that there was a substantial difference between the costs arising from a contested as opposed to a non-contested application, the court decided that it would be unreasonable for the VR Family Trust to bear the costs resulting from the contested application, and ordered that they be paid by the Protector on the indemnity basis (subject only to two minor aspects for which the Protector was not responsible).