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08 October 2015
In the matter of the Y Trust(1) centred on protracted and hostile divorce proceedings between two beneficiaries of the trust (referred to in the judgment as 'the mother' and 'the father'). The divorce was initiated in 2012 and a settlement was finally reached on the third attempt in 2015.
The agreement provided for the division of the trust's property between the mother, the father and their children. While the mother and children were beneficiaries of the trust, the father had inadvertently become an excluded beneficiary. Therefore, it was proposed that the trustee close the class of beneficiaries and terminate the trust so that the beneficiaries could direct the trustee to distribute the assets of the trust in accordance with the agreement. The agreement included provisions to limit the trustee's potential exposure when making payments to an excluded beneficiary (ie, the father).
The trustee was concerned that there was a conflict of interest between limiting its liability and its duties to the trust. As such, it sought to surrender its discretion to the Royal Court in relation to the exercise of the powers outlined in the agreement.
In re S Settlement(2) set out the test to be applied to applications to surrender discretion to the court:
"[T]he 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 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." (Emphasis added.)
However, the test may be applied on a restricted basis only. This was emphasised in In re B Settlement by the Court of Appeal,(3) which held that a surrender of discretion should be regarded as a last resort, and that the court will typically accept applications only where no "sensible alternative" exists.
The court held that the agreement was undoubtedly in the interests of the mother and children, as it would bring an end to the expensive and lengthy divorce proceedings. However, the court accepted that the express intention in the agreement to remove any risk to the trustee also represented a conflict of interest.
Before accepting the surrender of discretion, the court considered whether a sensible alternative existed.
The court held that while the trustee could have distributed the entirety of the trust to the mother in order to discharge its obligations under the agreement, this would have been unacceptable to the father following the lengthy and hostile divorce proceedings.
The court also considered whether the trustee should have made the relevant decisions under the agreement before seeking the court's blessing. The court held that this may have been problematic, as it must be satisfied that the trustee's decisions were not vitiated by any actual or potential conflict of interest which had or might have affected its decision.
The alternative solution to a surrender of discretion would have been arbitration; however, the court felt that this was inappropriate, as the arbitrator had no control over the trustee or the trust property.
The court accepted that no sensible alternative existed to a surrender of the trustee's discretion, and thus granted the request and directed the exercise of the relevant powers in accordance with the agreement.
This judgment serves as a reminder that applications to surrender discretion to the court should not be undertaken lightly. Trustees considering this option should investigate whether any sensible alternatives exist before proceeding. This judgment also demonstrates that while such decisions are intended as a last resort, the court will be practical its considerations. As such, trustees that feel paralysed by a conflict – even where the end result is preferable to the beneficiaries – have some form of recourse.
For further information on this topic please contact Steve Meiklejohn at Ogier by telephone (+44 1534 504 000) or email (email@example.com). The Ogier website can be accessed at www.ogier.com.
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