In the case of X (as Trustee of the A Trust) v Y (beneficiary of the A Trust), the court reiterated the importance for Trustees of seeking Beddoe relief before commencing or defending an action. Obtaining Beddoe relief ensures that Trustees are more likely to be indemnified against any adverse costs consequences than without such relief. The court also found that interested non-beneficiary third parties should be provided with informal notice of a Beddoe application but that the interests of the beneficiaries of a Trust outweigh the interest (actual or potential) of any third party in the trust assets in assessing the Trustees’ application.
The Claimant in these proceedings was the Trustee of the A Trust. The Trustee was involved in English proceedings in respect of a Sale and Purchase Agreement (“SPA“) which involved a claim against a consortium of sellers (including the Trustee) in relation to (a) breach of warranty, and (b) the tort of deceit.
The breach of warranty claim related to, amongst others, failure to disclose a dispute between the Trustee and another defendant (in the English proceedings) which was ongoing at the time of the execution of the SPA. The claim for deceit arose on the basis that the defendants (in the English proceedings) allegedly made material misrepresentations to the claimant (in the English proceedings) (“Z“) that no funds had been invested in the ill-fated Madoff Funds. Z avers that such investments were made before the SPA was signed and came to its attention after the SPA was executed.
The Trustee had sought directions from the Court to defend the English proceedings. It also sought orders permitting it to borrow funds from the C Trust (i.e. another Trust), to discharge the costs of defending the English proceedings and, pre-emptively, for an indemnity for any costs and expenses properly incurred for those purposes, which would have been ultimately reimbursed from the A Trust assets.
The case of Re Beddoe established the principle that Trustees are able to apply to the court to seek permission to commence or defend proceedings using the trust assets while also obtaining an indemnity from the Trust for any adverse cost consequences. (That indemnity can be lost if the Trustees have failed to make full disclosure of all material facts when making the application for relief.)
It is important to note Trustees who do not seek Beddoe relief are not automatically barred from recovering the costs of litigation from the Trust funds. However, such Trustees do not have the same certainty of protection as they would if they had obtained Beddoe relief.
The importance of seeking Beddoe relief
The Cayman courts have general jurisdiction to provide relief to a trustee in relation to the management or administration of trust money under section 48 of the Trusts Law (2011 revision). The case of Re Beddoe allows for the applicability of such directions specifically on the question of engagement in litigation.
Smellie CJ re-iterated Lindley LJ’s position in Re Beddoe where he stated that “…a trustee who, without the sanction of the Court, commences an action or defends an action, unsuccessfully, does so at his own risk as regards the costs, even if he acts on counsel’s opinion” especially given the “ease and comparatively small expense with which trustees can obtain the opinion of the Chancery Division on the question whether an action should be brought or defended at the expense of the trust estate“.
Therefore, the Court found the Trustee had adopted the correct approach in this case by seeking Beddoe relief from the court before proceeding with the litigation.
Rights of non-beneficiary third parties in a Beddoe application
The Trustee had provided Z with informal notice of the Beddoe application. However, Z contested that it should have been provided with formal notice so that it could have made appropriate formal representations to the court.
Smellie CJ found that in circumstances where Z is not a beneficiary in the A Trust, it is merely a third party asserting a disputed personal claim in contract or tort against the Trustee. Therefore, Z’s claim is one which is a dispute between a third party and a Trustee in relation to liabilities assumed by the Trustee in administration of the Trust. In such circumstances there is no need for Z to be provided with formal notice of the Beddoe application. However, Smellie CJ also found that Z would be adversely affected if its claim was successful and the Trustee had defended the claim at the expense of the Trust because the costs of the defence would reduce the value of the assets against which Z would have been able to enforce its judgment. The Trustee had therefore been correct to provide Z with informal notice of the Beddoe application. The court also took into account the representations made by Z in its response letter.
Given that Z’s claim exceeded the value of A Trust, if that claim were to be undefended the A Trust would certainly be exhausted to the detriment of the beneficiaries. However, in deciding how much weight should be given to Z’s interests, Smellie CJ decided that a contingent or putative creditor in Z’s position is not capable of asserting a proprietary claim to the Trust assets, and takes the Trust Assets as it finds them at the time of the judgement. The Trustee obtained Beddoe relief in these proceedings and was allowed to defend the English proceedings and would have had an indemnity from the Trust assets for the costs reasonably incurred in defending the claim.
As this case illustrates, it is important for trustees to ensure that:
- they seek the court’s permission before bringing or defending claims in relation to the trust assets (i.e. seek Beddoe relief); and
- to the extent that there are third parties interested in the trust assets who would be adversely affected by the outcome of any litigation, they should be provided with informal notice of any application for Beddoe relief.