In Jasmine Trustees Ltd v Wells & Hind (A Firm)  EWHC 38, the High Court of England and Wales interpreted “individuals” in Section 37(1)(c) of the Trustee Act 1925 (“TA 1925“) as meaning natural persons and not corporations. Accordingly, the appointment of an investment bank as one of the replacement trustees was ineffective in discharging the original trustees of the settlement. This resulted in a series of acts being rendered invalid and the trust being liable to capital gains tax. The Judge also considered the status of invalidly appointed trustees, concluding that they were trustees de son tort. Such trustees may be liable for breach of trust but do not have the same powers as a validly appointed trustee. Section 38(1)(c) of the Trustee Ordinance (Cap 29) in Hong Kong has retained the same wording as the old Section 37(1)(c) TA 1925. This decision is, therefore, likely to be important if similar questions of interpretation arise in Hong Kong.
A husband and wife created a family settlement in 1968, of which they were the original trustees. In 1982, the trustees executed a deed of retirement and appointed an investment bank and an individual to be the new trustees. The issue that arose in the proceedings was whether the retirement of the husband and wife as trustees was effective.
Section 37(1)(c) of the TA 1925, as originally enacted, states
“On the appointment of a trustee for the whole or any part of trust property…a trustee shall not be discharged from his trust unless there will be either a trust corporation or at least two individuals to act as trustees to perform the trust.”
The claimants argued that the resignations of the original trustees were not effective because they were not replaced by two individuals, as required by section 37(1)(c), but by a corporation and an individual. The defendants challenged this, submitting that the word “individuals” was capable of including corporations.
The High Court held that “individuals” meant natural persons and did not include corporations. The principal reasoning for this was first, the word “individual” has a natural meaning which does not include companies and, second, the word “persons” was used in other provisions of the act, which demonstrated that individuals was deliberately chosen by the legislature to distinguish section 37 from other sections, pursuant to which corporations might be trustees.
The effect of the judge’s interpretation of section 37(1)(c) meant that the husband and wife did not validly retire in 1982 and, following the husband’s death, the wife had remained as a trustee. As the wife did not participate in any decision since her purported resignation, the exercise of various trustee powers requiring the involvement of all trustees, including the appointment of successor trustees, was invalid.
The High Court went on to consider the status of the invalidly appointed trustees in both a tax and trusts context. For the purposes of the tax legislation, it was held that such ostensible trustees were “trustees de son tort” – not trustees of the settlement but rather trustees of the trust property vested in them. When determining the tax liability of the settlement, the Court found that the Taxation of Chargeable Gains Act 1992 applied as if the assets were really vested in the actual trustees and as if the trustee de son tort’s acts were the acts of the actual trustees. Furthermore, the actual trustees were considered to be a single continuing body of persons and, accordingly, the residence of the trust was ascertained by reference to them. As the majority of the trustees were resident in the UK during the life of the settlement, the trust was subject to capital gains tax.
It was also concluded that a trustee de son tort is a kind of constructive trustee, but with a limited status. Such trustees will be liable for breach of trust in the same manner as a validly appointed trustee and will be obliged to hold the property for, and to account to, the beneficiaries, but will not have the powers of a trustee conferred by the settlement.
Take away points
Although the Trusts of Land and Appointment of Trustees Act 1996 replaced “individuals” in section 37(1)(c) TA 1925 with “persons”, which does include corporations, this decision is still relevant for trustees in the UK who retired before 1 January 1997 and appointed corporations as their replacement. Further, as mentioned above, section 38(1)(c) of the Trustee Ordinance (Cap 29) in Hong Kong has retained the same wording as the old Section 37(1)(c) TA 1925. This decision is, therefore, likely to be important if similar questions of interpretation arise in Hong Kong.
The two key points of this decision are:
- An error in the appointment of new trustees or the resignation of old trustees can have disastrous consequences, including rendering invalid the exercise of various trustee powers.
- A trustee de son tort is not a trustee of the settlement, but is a trustee of the trust property vested in him. Such trustees do not have the powers conferred by the settlement but may be liable for breach of trust.