Jersey court exercises its power to set aside the actions of a settlor and ratify those of a purported trustee

In the recent decision of the Royal Court of Jersey In the Matter of the Z Trust [2016] JRC 048, the Royal Court declared voidable and set aside the appointment of trustees based in the UK by the settlor of a Jersey trust. The court did so on the grounds that the settlor either made a mistake, or did not take into account "relevant considerations" at the time of making her decision. The court then considered its power to ratify the acts of the purported trustees during the period in which they believed that they were trustees, in order to protect the Trust from falling within the remit of UK corporation tax.

The case is an example of the application of Articles 47G & H of the Trusts (Jersey) Law 1984, which was introduced as a response to the UK Supreme Court decision in Futter v Futter [2013] 2 AC 108. The Royal Court then had to consider the consequences of its decision to invalidate the appointment of new trustees, including whether, and if so, how, to approve acts taken by the purported trustee during its period acting as trustee.

Background

The settlor established a discretionary trust governed by Jersey law. The principal asset of the trust was a shareholding in an offshore company (the "Company") that owned two properties in England. However, the settlor developed a number of (irrational) concerns, including that the trustee was going to sell one of the properties at an undervalue and that the settlor's family abroad would be able to steal the assets of the Trust because the Trust was based in Jersey. The settlor's primary motivation was to ensure that her son, a beneficiary (the "Beneficiary") had his future safeguarded and she felt that this would be best done by appointing UK trustees.

The settlor commissioned a tax note from English solicitors outlining the tax consequences of moving the Trust onshore. However, the note did not make clear the impact of taxation at both the level of the Company and trust, and the settlor did not seek further tax advice, despite this being recommended in the note. The settlor then exercised her power to appoint new UK trustees (the "purported trustees") who replaced the Jersey trustees. The directors of the Company appointed by the old trustees were replaced by a new director (a UK resident company). These changes had the effect of bringing both the Trust and Company onshore, which in turn had significant adverse tax consequences resulting in a tax charge approaching 40% of the value of the assets of the Trust.

Decision regarding setting aside the actions of a settlor

Following the death of the settlor, the Beneficiary applied to the Royal Court to seek to have the appointment of the new trustees set aside. The Royal Court decided that it had the power to invalidate the exercise by the settlor of the power to appoint new trustees on a number of grounds.

First, the Royal Court has an inherent jurisdiction to set aside an appointment of trustees. This is so because the power to appoint new trustees is a fiduciary power and if that power is misused, then the Court may step in (Re Z [2015] JRC 196C followed and article 51 of the Trusts (Jersey) Law 1984 (the "Trusts Law") applied). The Court decided that this was an appropriate circumstance in which to step in, because the appointment of the new trustees (a) was not in the interests of all the beneficiaries of the Trust, (b) had serious negative tax consequences, and (c) was irrational.

Second, Article 47G of the Trusts Law allows the Royal Court to declare the exercise of the power of a trustee voidable and of no effect from the time of its exercise, where it was exercised due to a 'mistake'. The Royal Court decided that the settlor did make a mistake when she appointed UK trustees for the following reasons:

• She had not appreciated that the power of appointment was a fiduciary power and so had to benefit all of the beneficiaries: instead, her actions had been motivated by a desire to benefit one beneficiary (her son, the Beneficiary (who ironically was the person now seeking to set aside the appointment));
• She wrongly believed that moving the Trust onshore would protect the Trust assets; and
• She did not appreciate the tax consequences of her actions.

The Royal Court held that if she had appreciated her mistake, she would not have exercised the power of appointment in the way she did and therefore given the "magnitude" of the mistake, the Court set aside her appointment of the trustees with effect from the time of its exercise.

Finally, Article 47H of the Trusts Law allows the Royal Court to set aside the exercise of fiduciary powers if the settlor failed to take into account relevant considerations, or took into account irrelevant considerations and would have acted differently had they done (or not done, as the case may be) so. The Royal Court decided that the settlor did not take into account the true effect on the Trust of the steps she was taking, and would have acted differently had she taken it into account; no reasonable person who was aware of the effect of bringing the Trust onshore would have taken the steps she did. The settlor's actions could also be, and were, set aside on this ground.

The Company

The Royal Court also had to consider the position of the Company. The change in directors and transfer of shares from the old trustees to the purported trustees had brought the Company onshore. These were not acts of the settlor, but were a direct consequence of the settlor having exercised her power of appointment to change the trustees.

Applying Tait v Apex Trustees Limited [2012] JRC 148, the Royal Court held that because there was a "sufficient link" between the exercise of the power of appointment and the changes to the membership and directors of the Company, those changes should be treated as one related transaction and so those changes could also be set aside.

This raised the question of the position of third parties because following the change in directorship, one of the Company's assets had been sold and the third party had dealt with the director who had now been held not to have been appointed. However, at the request of the Royal Court, one of the parties had obtained an opinion from English counsel, whose advice on English law (which was accepted by the Royal Court) was that the third party's interests would not be affected (as the third party had no notice of the defect in the director's appointment) and therefore the sale of the asset would also not be affected.

Consequences

Having decided the appointment was invalid, the Royal Court then had to consider the practical consequences of the invalidity of the appointment. The immediate effect was that the old (retired) trustee was reinstated in circumstances where it no longer wished to be trustee.

Furthermore, the old trustee had, in fact, remained trustee for the whole period, notwithstanding that it thought it had retired. This meant it had not taken any action in relation to the trust assets and was therefore, technically, in breach of trust.

In relation to the first issue, the Royal Court granted its sanction to the retirement of the old trustee in favour of a new (Jersey) trustee. In relation to the potential breach of trust, the court exonerated the former trustee for any breach of trust arising from its failure to act as trustee following the date of its purported resignation.

However, the more serious consequence was that by invalidating the appointment, the court had effectively created a vacuum in the trusteeship: to the extent the purported trustees had taken decisions and exercised powers, they were not doing so as trustee, because they had never been appointed trustee. However, the old trustee (who had, in fact, remained trustee) was not aware it was trustee and had not dealt with the trust assets. The court was therefore required to grapple with the question of how to ratify or confirm the acts taken by the purported trustee during its period "in office".

The parties had originally sought ratification of the decisions taken by the purported trustees. However, the Royal Court expressed doubts as to the issue of whether a jurisdiction to ratify existed and it therefore invited further submissions, including an opinion from English counsel on the point. An opinion was obtained from English counsel which was influential in the court's decision.

Although the point was not decided by the court, it appears the court believed it has the power (at least in relation to certain acts) to ratify or confirm acts of a person acting in circumstances such as those of the purported trustee. However, in the present case, rather than ratifying or validating the acts, the court preferred an approach of confirming the acts by non-intervention. This meant that orders were made directing the new trustees not to take any steps to undo or otherwise interfere with the acts or omissions of the purported trustee. Whilst not formally ratifying those acts, this had the effect of leaving those acts or omissions undisturbed.

The court could have left it to the new trustees to decide what steps to take. However, as the issue of the validity of the acts and omissions of the purported trustee had arisen only as a result of the court's order invalidating the appointment, the court considered that it was appropriate for it to make these orders removing that doubt.

Comment

This case usefully demonstrates how the Royal Court will use Jersey's recently enacted amendments to the Trusts Law to set aside the actions of trustees where it is appropriate and just to do so. In this respect it confirms that the rule in Hastings-Bass continues in Jersey. Furthermore, the Court will be prepared to set aside any other consequential actions that are sufficiently linked to the primary action being undone.

The case also confirms in circumstances where a trustee is found to have been invalidly appointed, there are means available to the court to confirm that acts taken by that person are effectively validated and where the defect arises from the consequences of a court order (as here) the court will strive to create certainty for the parties. That said, in the present case, all parties were seeking to have the acts of the purported trustee ratified or confirmed. In a different case where there might be a dispute as to certain of those acts, the position might be more complex.