Trustee is piggy in the middle – can he just give up?

In In the matter of the Y Trust [2015] JRC 059, the Royal Court of Jersey was called upon to decide whether a trustee could surrender its power to the Court, so that the Court could exercise that power. The trustee was caught between a husband and wife who had had an acrimonious divorce. It did not want to exercise his power itself, for fear of criticism (or worse) from one or both of the parties. The Court decided to help the trustee by allowing it to surrender the power.

The general position is that trustees must exercise their powers personally. This means they cannot delegate their powers to any other person. However, there are some exceptions to this, including rare cases where the Court will allow trustees to "surrender" their powers. In these instances, the Court will exercise the trustees' powers for them. The court will:[1]

"Act as a reasonable trustee could be expected to act having regard to all the material circumstances and is not bound by the wishes of any beneficiary. The court has, however, no greater powers than the trustees have either under the trust instrument or under general law. Trustees who surrender their discretion must put the court into possession of all material necessary to enable the discretion to be exercised…"

The classic cases in which Courts will allow trustees to surrender their powers involve trustees who are deadlocked, or trustees who have a conflict of interest.

The background to In the matter of Y was that the trust had been settled by the husband's father. It was always intended by him and the husband that the husband, wife and children would benefit from the trust, notwithstanding that the husband was not and could not be a beneficiary under the terms of the trust. The beneficiaries were described in the trust deed as the wife, the children and the husband's sister and her children. The assets of the trust were businesses which the husband operated. The trustee did not historically interfere with the running of the businesses on the basis that they were being successfully run to the satisfaction of the husband and wife.

However, the marriage of the husband and wife ended. Divorce proceedings were instituted in New York. Those proceedings were bitterly fought, and were the subject of two failed settlement attempts. Finally, on the eve of trial, the husband and wife settled the divorce proceedings. One of the terms of their settlement was that US$12.17m was to be distributed from the trust fund to the husband.

After the husband and wife separated, the trustee took steps to ensure that it had proper control of the assets which it owned as trustee of the trust. These steps included Court proceedings to obtain greater information about the trust assets in New York, Delaware, Mauritius, the Bahamas and India. All of these steps were resisted by the husband, who accused the trustee of acting maliciously.

Against that background, and despite the husband and wife's agreement, the trustee was reluctant to take any steps which would see a non-beneficiary (the husband) receive a substantial sum from the trust fund. It therefore sought to surrender his power to make the distribution sought.

The Court received submissions from the husband, wife, children, husband's sister and counsel for unborn beneficiaries. All of these parties agreed with the husband and wife that the distributions agreed between the husband and wife (including the distribution to the husband) should be made.

The Court held first that the distributions could be made. It found that the distributions would be for the benefit of the beneficiaries of the trust because the wife (as a beneficiary) would be free of the hostile divorce proceedings. Her children were also to receive benefit under the terms of the divorce settlement.

The Court also agreed with the trustee that it could surrender its power to make the distributions to the Court. It found that the trustee had a conflict of interest because the arrangements between the husband and wife were premised on the trustee applying to Court to surrender its power so the trustee would not have any liability – if the trustee did not do so, then it would face arbitration at the instigation of the husband and wife. The parties had therefore contrived to apparently ensure the trustee had a conflict of interest so that the Court would allow the trustee to surrender its power.

We anticipate that Courts will seek to act cautiously in these cases so as not to encourage the parties to put trustees in positions of conflict. However, here it seemed obvious to the parties and the Court that the distribution to the husband should be made, so there was no harm by the trustee surrendering this specific power to the Court.

For further information, please contact Richard Norridge, Partner, or your usual Herbert Smith Freehills contact.

[1] Lewin on Trusts as cited in In the matter of the Y Trust [2015] JRC 059 [16].