The Cayman Islands Grand Court has accepted for the first time the surrender of discretion of a trustee in relation to certain dispositive and administrative requests from a beneficiary. In this article, Trainee Solicitor Amy Wills and Partner James Price in our Trust and Probate Litigation team examine the recent trusts case of HSBC International Trustee Limited v Tan Poh Lee and Ors FSD 175 of 2019 (IKJ).
HSBC (the Trustee) was a trustee of the Tan Kim Choo Family Scholarship Trust (the Trust), which was settled on 21 October 2002. The proper law and forum for administration of the Trust was the Cayman Islands.
The Trust was discretionary, and the Settlor was the father of the first to fourth defendants (described as the Secondary Beneficiaries) and the grandfather of the fifth to tenth defendants (described as the Primary Beneficiaries).
The Honourable Justice Kawaley summarised the Settlor’s wishes as being that the Trust be divided into two sub-funds with the following qualifications:
- The first sub-fund was to be for the benefit of his grandchildren. His children had no right to interfere with the Trustee’s management of that part of the trust fund;
- The second sub-fund was for the benefit of the first defendant and could be used for the construction of T Tower, a building which the Trustee understood to be complete and leased to an entity controlled by the third defendant (75% of the Trust assets were notionally allocated to this sub-fund).
Therefore, on the face of these wishes, the first defendant was the only child, as opposed to grandchild, intended to benefit from the Trust.
The genesis of the Trustee’s application
Following the Settlor’s death on 29 August 2018, a dispute broke out between his children as to the administration of his estate and the Trust, largely relating to the Settlor’s capacity following a stroke three years before his death. Proceedings were issued in Singapore in October 2019 (the Singapore Proceedings), in which the third defendant sought a mandatory injunction compelling the Trustee to distribute the Trust assets to him, terminate the Trust and resign as Trustee. This was based, among other things, on the allegation that the Trustee was liable for breach of fiduciary duty in failing to comply with his previous requests for it to do this.
The Singapore Proceedings raised the following challenges for the Trustee:
- Could the Trustee properly decide for itself whether to defend the Singapore Proceedings when it was alleged that resisting the third defendant’s claims constituted a breach of fiduciary duty?
- Could the Trustee properly admit the claim in circumstances where to do so would arguably be both: i. at odds with the Trustee’s duties under the Trust (which defined the grandchildren as “Primary Beneficiaries”); andii. in violation of a Malaysian injunction (an injunction obtained by the first defendant, which purported to freeze the Trust assets and prevent their disposal).
- Could the Trustee, in light of the modest value of the Trust Fund, find a way of mitigating the risks of depleting the Trust assets on costly litigation?
The application before the Grand Court
The Trustee sought directions from the court as to the stance it should adopt in the Singapore Proceedings.
Counsel for the Trustee identified that this was a Public Trustee v Cooper “Category 3” case. In Public Trustee v Cooper, Mr Justice Hart quoted from an unreported judgment the four categories of cases in which the court will exercise its powers to “bless” decisions made by the trustees in advance of the relevant action being taken. In category 3 cases, the Trustee seeks surrender its discretion to the court. However, “the court will only accept a surrender of discretion for a good reason, the most obvious good reasons being either that the trustees are deadlocked (but honestly deadlocked, so that the question cannot be resolved by removing one trustee rather than another) or because the trustees are disabled as a result of a conflict of interest”. As a result, category 3 cases are rarely bought before the courts.
Counsel for the Trustee referred to certain other relevant principles applicable in a Category 3 application, as set out in the Jersey case In the matter of X Trust  JRC 171:
- Where a trustee is faced with the need to consider exercising discretion in a way which is either adverse to or consistent with its personal interests, a conflict of interest arises which makes it impossible for the discretion to be properly exercised; and
- On such an application, the trustee should remain neutral, “its only role being to ensure that all matters are appropriately drawn to the court’s attention”; and
- If a trustee is directed to defend hostile litigation, it is appropriate for the trustee not to personally be at risk in relation to the costs of such litigation.
The other three Public Trustee v Cooper categories can be described as follows:
- Category 1 cases are where there is an issue as to “whether some proposed action is within the trustees’ powers”.
- Category 2 cases are where “the issue is whether the proposed course of action is a proper exercise of the trustees’ powers where there is no real doubt as to the nature of the trustees’ powers and the trustees have decided how they want to exercise them but, because the decision is particularly momentous, the trustees wish to obtain the blessing of the court for the action on which they have resolved and which is within their powers”.
- Category 4 cases are where trustees “have actually taken action, and that action is attacked as being either outside their powers or an improper exercise of their powers”.
The Grand Court’s judgment
Importantly, the court accepted the accuracy of paragraph 27-083 of Lewin on Trusts, Nineteenth Edition, which explains the role of the court in surrender of discretion cases:
“Where the trustees surrender discretion to the court, it acts in their place by giving directions. In doing so, the court will act as a reasonable trustee could be expected to act having regard to all the material circumstances and is not bound by the wishes of any beneficiary. The court has, however, no greater powers than the trustees have either under the trust instrument or under the general law.”
In its judgment, the court found that it was clear that no reasonable trustee would accede to the wishes of the third defendant. The court also agreed with counsel for the Trustee that it was “seriously arguable” that the proposed distribution fell outside of the parameters of the settlor’s wishes, not least because terminating the Trust and distributing the bulk of its assets to a Secondary Beneficiary would, self-evidently, be wholly at odds with the best interests of the Primary Beneficiaries.
In circumstances where it was alleged that resisting the third defendant’s claim constituted a breach of fiduciary duty, there was “good reason” for the Trustee to surrender its discretion to the court and it was appropriate for the court to accept that surrender in the circumstances of this case. Therefore, in exercising the Trustee’s discretion on its behalf, the court decided that the appropriate response to the Singapore Proceedings was for the Trustee not to:
- make the distribution sought by the third defendant in the Singapore Proceedings;
- terminate the Trust; or
- resign as Trustee.
Although Category 3 cases are unusual, the Grand Court’s judgment serves as a helpful reminder for trustees that when it seems that there is no right answer the court’s assistance can be sought and will, in the right circumstances, be given. While this decision is not binding on the courts of England and Wales, it is likely to be persuasive and may also be informative of the approach in the offshore world generally. Further, while trustees should remain neutral in such applications and, ideally, the court would hear in substance from the key beneficiaries, where those beneficiaries are not before the court, it is appropriate for the trustee to adopt a more active role, albeit they should still present the facts in a neutral manner.