A recent case before the Royal Court(1) concerned an application by Capita Trustees Limited in its capacity as trustee of the Dunlop Settlement seeking approval for entering into an agreement intended to settle various claims made against the trust by creditors, the net effect of which would be to exhaust the assets of the trust.
The Dunlop Settlement was a discretionary trust of which Capita became the trustee on its acquisition of Stirling (the previous trustee of the trust). The current beneficiaries were:
- RS, the first respondent, who did not participate in these proceedings; and
- NS, the second respondent and wife of RS.
RS was the alleged settlor of the trust. He was declared bankrupt in 2008, his trustees in bankruptcy were named as the third respondent.
At all material times the affairs of the trust were looked after by Mr Arthur, who failed to keep proper records in relation to the trust. It appeared that the trust had three main assets:
- Kildwick Hall, home to RS and NS;
- The Mullions, a property occupied by the mother of NS; and
- a potential claim against a company called BDO Secretaries Ltd for £275,000.
There were three other relevant entities administered by Arthur:
- the Humberstone Trust;
- Faircliff Property Ltd, a company owned by the Humberstone Trust; and
- Pestana Investments Ltd, which was also probably owned by the Humberstone Trust.
The trustees of the Humberstone Trust (together with some of its underlying companies, including Faircliff, and some of its beneficiaries) brought proceedings in Jersey against Capita, alleging that in breach of trust, loans were wrongly paid out of the assets of the Humberstone Trust or its wholly owned subsidiaries, by Capita (then Stirling) when it was the trustee of the Humberstone Trust.
The plaintiffs alleged that some of the loans were made to the Dunlop Settlement (or to companies within it) for the purchase of its assets.
It was claimed that the trust was liable to:
- Pestana and/or Faircliff for the repayment of monies used to purchase Kildwick Hall, to the value of £1,164,731.26 (plus interest);
- Faircliff for the repayment of a loan of £380,000 (plus interest), provided to purchase The Mullions;
- Faircliff for £550,000 paid directly to RS, although it was considered by the leading counsel that these moneys were lent to the trustee rather than to RS and therefore amounted to a liability of the trust; and
- Faircliff for £673,000 in respect of a debt novated to the trustee.
In addition to the above claims, the trustee in bankruptcy alleged that the trust was a sham and that all of the assets were held as a nominee for RS, and therefore for the trustee in bankruptcy. The trustee in bankruptcy also alleged that it was entitled to claim from the trust for £550,000 allegedly spent by RS on improving Kildwick Hall.
The leading counsel for Capita and NS agreed that there were no viable defences available to the claims made in respect of The Mullions, the loan by Faircliff of £550,000 or the novated debt. When interest was levied on these claims the total claim amounted to £2,438,000.
There was no agreement regarding the Kildwick Hall loan, but irrespective of whether that claim was accepted, it was evident that the value of the claims against the trust was likely to exceed the total value of the trust assets, which was approximately £2,375,000.
Following negotiations between Capita and the plaintiffs, a full and final agreement to settle any claim which could be made by Faircliff, Pestana, the Humberstone trustees or the trustee in bankruptcy against Capita was agreed in principle whereby:
- proceedings would be brought to enable vacant possession of Kildwick Hall by the trustee in bankruptcy at its own cost;
- the trustee in bankruptcy would sell Kildwick Hall and The Mullions at its own initial cost;
- the proceeds of the property sales, the claim against BDO Secretaries and the chattels of the trust would be divided with 25% going to the trustee in bankruptcy and 75% to Faircliff, unless the realisable assets exceeded £4.8 million, in which case the balance would be split equally between the trustee in bankruptcy, Faircliff and Capita;
- any other assets, including potential claims against Mr Arthur and RS would be allocated to Faircliff; and
- provision was made for how to proceed if new assets were discovered.
Representations made on behalf of the beneficiaries
NS argued that the court should not approve the agreement, on the principal ground that there was no gain for the beneficiaries in the agreement being entered into. There would be no assets left in the trust following its implementation, and RS and NS would be evicted from their home of many years.
RS also argued that claims by the trustees of the Humberstone Trust might not succeed and it was too early to settle those claims, as discovery had not been given.
The court held that Capita had at its own cost expended considerable efforts to establish the facts surrounding the claims made against the trust assets. The court, assisted by the opinions of the leading counsel, formed a view that the claims (including the Kildwick Hall loan claim) were likely to succeed and the court thought it highly unlikely that evidence to the contrary would come to light.
The court accepted that a trustee had to act in the best interests of the beneficiaries, but this did not mean fighting a hopeless case. The court held that a trustee is under a duty to act reasonably and, if satisfied on good grounds that a claim is due, it should pay. It was not necessary for the trustee to think it was an open-and-shut case before acting.
The court further concluded that there was no benefit to the beneficiaries in the court declining to approve the settlement. In such circumstances it was likely that proceedings would be brought against the trust and the trustee would have no liquid funds with which to pay for a defence. Capita might attempt to borrow against the properties or to sell them to fund a defence, but the court thought it unlikely that a court would authorise costs to be incurred in this way since both Faircliff and Pestana had "strong" proprietary claims. The court judged that there was no prospect of Capita being able to fund the proceedings, and since neither beneficiary had any funds there was no prospect of them being in a position to pay for the defence.
The court was further satisfied that the value of the Faircliff and Pestana claims exceeded the value of the trust assets and that there was therefore no 'equity' in the trust fund available for the beneficiaries.
Accordingly, the court held it was "entirely proper and reasonable for [the] trustee in such circumstances to accept the inevitable and to pay debts which he considers on good grounds are lawfully due".
The court therefore authorised Capita to enter into the agreement.
For trustees, threatened claims in circumstances where the trust assets are insufficient to meet those claims pose difficult issues to contend with.
While it is evident that the court considered the competing interests of the parties, and in particular those of the creditors and the beneficiaries, the court determined that the assets should be available for the creditors before the settlor and his wife. This demonstrates the court was prepared to accept that third-party creditors' interests rank ahead of the interests of a beneficiary when the creditors' claims are established or are demonstrated to be essentially indefensible.
This case further reflects the pragmatic approach taken by the Jersey courts in trust matters and in particular the approach to considering settlement of litigation when the trustee has surrendered its discretion. The court's approach will be welcomed by third parties, which will be comforted by the court's clear guidance that notwithstanding a trustee's duty to act in the best interests of beneficiaries, a trustee should satisfy a third party's claim if it is reasonably satisfied on good grounds that the sum is lawfully due. The decision may also help trustees to resist pressure from one or more parties to play a more active role in hostile disputes, whether in relation to pursuing or defending claims or negotiating settlement terms.
The duty of a trustee when faced with hostile claims will invariably be to remain neutral; therefore, for a trustee in any doubt on the appropriate position to adopt an application to the court for directions remains the most prudent course of action.