Jersey Unreported Judgments

Trust - reasons for refusing to bless a momentous decision

[2023]JRC075

Royal Court

(Samedi)

12 May 2023

Before     :

A. R. Binnington, Esq., Commissioner, and Jurats Ramsden and Ronge

 

IN THE MATTER OF THE REPRESENTATION BY X TRUSTEES LIMITED

AND IN THE MATTER OF THE D TRUST AND THE E TRUST

AND IN THE MATTER OF ARTICLE 51 OF THE TRUSTS (JERSEY) LAW 1984 (AS AMENDED)

Advocate J. P. Speck for the Representor.

Advocate A. Kistler for the Eighth and Ninth Respondents.

Advocate D. Evans for the Minor Beneficiaries as Guardian Ad Litem.

Advocate J. M. Sheedy for the Second to Seventh Respondents.

judgment

the COMMISSIONER:

1.        This is an application by the Representor ("X Trustees"), as trustees of the D and E Trusts (together "the Trusts"), for the Court to bless a momentous in-principle decision by the X Trustees to terminate the Trusts and distribute the assets to certain beneficiaries in accordance with a step plan ("the Step Plan")..

2.        At a hearing on 16 March 2023 we refused to bless the X Trustees' decision and we now give our reasons for that refusal.

[The judgment has been heavily redacted to protect the interests of the Representor in any ongoing litigation, but it is published for the points of principle contained in it]

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The first application

14.      An application to the Royal Court was made and listed to be heard in 2022 which was intended to be for the purpose of blessing an intended decision by the X Trustees to distribute the assets of the Trusts in equal shares to four of the Respondents, and to wind up and dissolve the underlying entities of the Trusts, as contemplated by the Settlement Agreement.  The basis of the application was that if the intended decision were to be blessed by the Court then the X Trustees would have an agreed position as to the future of the Trusts, which could be presented to the Revenue Authority for the purposes of the negotiation over what tax was payable and at what rates.  At that time it was proposed that the X Trustees would not terminate the Trusts until an agreement with the Revenue Authority had been reached.  However, the application was adjourned on the day of the hearing to give the X Trustees more time to take tax advice on what was proposed (which had become a further relevant factor) and to carry out further discussions with the beneficiaries, with a view to identifying a clear process by which the division of the trust assets between the beneficiaries might be achieved. The present application and the associated Step Plan are the result of the work carried out since that hearing was adjourned.

The position of the beneficiaries in relation to this application

15.      The application before us was supported by the beneficiaries but opposed by the Eighth and Ninth Respondents.  The guardian ad litem was broadly supportive of what the X Trustees were seeking to achieve but raised a number of concerns, including whether the X Trustees' assessment of the potential tax liabilities was unduly optimistic.

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The law: blessing applications

25.      The law in relation to the Court's blessing of a momentous decision is well established and was conveniently summarised by the Court of Appeal in Kan v HSBC International Trustee Limited [2015] (1) JLR Note 31; Representation of Otto Poon Trust [2015] JCA 109 at paragraph 14 of the judgment in the following terms;

"14. Where a trustee has made a momentous decision, that is a decision of real importance for the trust, and seeks the Court's approval for the decision, the legal test to be applied by the Court is well established in this jurisdiction. As explained in Re S Settlement [2001] JLR N 37, the Court must satisfy itself (i) first, that the trustee's decision has been formed in good faith, (ii) second, that the decision is one which a reasonable trustee properly instructed could have reached; and (iii) third, that the decision has not been vitiated by any actual or potential conflict of interest..."

26.      The Court of Appeal went on to observe at paragraph 16 that the:

"...decision may not be final, in that implementation of the decision may be conditional upon the Court's approval; and this, along with other circumstances of the particular case, may give colour to the degree of formality with which the Court requires the decision to be proved and the degree of detail which the Court requires to be given."

27.      At paragraph 19 the Court stated that the obligation on the part of the trustee is to:

"...put before the Court all relevant considerations (supported by evidence) and they should explain their reasons for reaching the decision, even though they are not otherwise obliged to make such disclosure to the beneficiaries. But the process by which the trustees satisfy the Court that the legal test has been met should not be confused with the substance of the test itself. Furthermore, each case will need to be decided on its own facts, and the degree of detail that is required from a trustee cannot be uniform in all circumstances. In some cases, a trustee's decision may come out of the blue, and if so it may require both the beneficiaries and the Court to be given the background and the context in considerable detail: in other cases, such as this, a trustee's decision may emerge from a situation that is well known to the interested parties, and that is likely to have an impact on the degree of detail required from the trustee by the Court."

28.      There may be cases, such as in the present application, where the application is contested by some of the beneficiaries.  We were referred to an example of such a case, being the decision in Jasmine Trustees Limited & anr, v M and ors. [2021] JRC 248 where a trustee sought the Court's approval to appoint all the assets of certain trusts amongst beneficiaries in specified proportions.  In that case, although the beneficiaries all agreed that the trusts should be terminated, there was real disagreement as to how the funds should be allocated.  The Court adopted the decision made by the Court of Appeal in Otto Poon (as set out above).  The Court also had to consider a submission made by one of the beneficiaries that the trustees were in a position of conflict of interest which disabled them from taking the decision in question.  In essence it was alleged that the trustees had administered the trusts in such a way that the opportunity to avoid a tax charge which was prejudicial to the relevant beneficiary was lost, and which was therefore potentially actionable at her instance.  The trustees did not accept that there was a conflict such as to require them to surrender their discretion.  The Court went on to consider whether in the circumstances the trustees' decision should be surrendered to the Court.  The Court concluded that the surrender was not necessary.

29.      In reaching its decision in this regard, the Court had relied on the decision in Hawksford Jersey Limited v A [2018] JRC 171, in which the Court had ruled on how any alleged conflict should be managed.  It held that there are, essentially, three options : firstly, the trustee may resign, although that may not always be practical or sensible; secondly, if the conflict is pervasive, the trustee should surrender its discretion to the Court; thirdly, the trustee may be in a position nevertheless to take the decision, although it will be prudent for that decision to be blessed by the Court.

30.      We were also referred to the decision in HSBC v. Kwong [2017] JRC 214A.  That case involved a proposed decision by a trustee to divide up the trust assets amongst family members in circumstances where there was an impasse amongst the members of the family.  The trustee had set out its proposals and invited the family members to discuss them, but agreement was not reached.  The trustee appointed PricewaterhouseCoopers ("PWC") to provide a valuation of the relevant assets, which was duly provided.  The trustee reached its formal decision to segregate the trust assets amongst family members and came up with a step plan.  The trustees' reasons were explained and explored by the Court, which considered that the proposals were in the "best interests of the beneficiaries as a whole", despite various objections by one of the beneficiaries. The Court concluded that the trustee had "acted reasonably in maintaining its decision despite (the beneficiary's) objections". The trustee had accepted that its decision as to how to approach the question of valuation of the assets was "finely balanced" and the Court considered that the trustee's approach in this regard could not be categorised as unreasonable.  In particular, the Court considered it was reasonable for the trustee not to defer matters, noting that despite a long period of discussion there was no good reason to believe that negotiation would be successful. The Court reached the conclusion that "the decision of the trustee... falls within the band of decisions reasonably open to a properly instructed trustee".

The X Trustees' decision

31.      The Trustee arrived at the decision which we were asked to bless at a meeting attended by the directors of A Trust Limited.  A large number of relevant documents were tabled and, in addition to addressing the reasons why they felt that the proposed decision was in the interest of the beneficiaries generally, the X Trustees identified the criticisms that the Eighth Respondent had made of the X Trustees' in-principle decision and the Step Plan and sought to address each one of them.  Having done so, the X Trustees concluded that the Step Plan be approved in principle, subject to the approval of the Court, that the Trusts be terminated and the net assets be distributed as to one quarter each to four of the Respondents, the whole in accordance with the terms of the Step Plan.  The X Trustees further decided to proceed with the application to this Court pursuant to its Public Trustee v Cooper jurisdiction. It was specifically resolved that there be no application to the Court for the X Trustees to surrender its discretion to the Court.

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Our conclusions

53.      We accept that a proposed decision to terminate the Trusts and distribute their assets is a momentous decision and that this was therefore an appropriate matter upon which to seek the Court's blessing.  We also accept that the in-principle decision is the result of extensive tax advice and has been the subject of a significant degree of consultation with the beneficiaries.  Furthermore, at their meeting to consider the matter the X Trustees carried out an extensive review of the need for the Trusts to be terminated and reviewed objections that had been raised by beneficiaries.  Notwithstanding these factors we were not prepared to bless the decision for the following reasons.

54.      Firstly, the X Trustees' potential conflict of interest, arising from its execution of the Settlement Agreement.  We would regard this as falling within the third category of ways in which a conflict can be managed, as set out in Public Trustee v Cooper (2001) WTLR 901, cited with approval in Hawksford Jersey Limited v A [2018] JRC 171:

"Thirdly, the trustees may honestly and reasonably believe that, notwithstanding a conflict affecting one or more of their number, they are nevertheless able fairly and reasonably to take the decisions. In this third case, it will usually be prudent, if time allows, for the trustees to allow their proposed exercise of discretion to be scrutinised in advance by the Court, in proceedings in which any opposing beneficial interests are properly represented, and for them not to proceed unless and until the Court has authorised them to do so. If they do not do so, they run the risk of having to justify the exercise of their discretion in subsequent hostile litigation and then satisfy the Court that that decision was not only one which any reasonable body of trustees might have taken but was also one that had not in fact been influenced by the conflict."

55.      This was unlikely to be a conflict that was so pervasive as to disable the X Trustees from taking the decision and thus require them to surrender their discretion to the Court but it was one that needed to be addressed.  In our view it was not sufficient for the X Trustees merely to state that the Settlement Agreement had been superseded by the Step Plan.  It should have set out its reasons why the alleged conflict did not exist, supported if necessary by advice that the mutual obligations in the Settlement Agreement had fallen away and, if they had not, explain why, notwithstanding the existence of a conflict, it was nevertheless in the interests of the beneficiaries to reach the in- principle decision.

56.      Secondly, the failure by the X Trustees to consider a worst-case scenario in relation to the tax liabilities.  Given that a higher tax liability could have disadvantaged one beneficiary more than the others the Trustee should have identified the potential maximum quantum and considered what impact that might have on the Step Plan.

57.      Thirdly, the failure by the X Trustees to satisfy themselves that the valuation was independent and objective.  In our view a reasonable trustee would not have relied, without further enquiry, on a valuation produced for one group of beneficiaries whose interests in the outcome differed from those in another group. 

58.      At the conclusion of the hearing, we indicated to the X Trustees that we would be prepared to entertain a further application should they decide to re-visit their decision in the light of our ruling.

Authorities

Kan v HSBC International Trustee Limited [2015] (1) JLR Note 31. 

Representation of Otto Poon Trust [2015] JCA 109. 

Jasmine Trustees Limited & anr, v M and ors. [2021] JRC 248. 

Hawksford Jersey Limited v A [2018] JRC 171. 

HSBC v. Kwong [2017] JRC 214A. 

Public Trustee v Cooper (2001) WTLR 901