BVI Court of Appeal Comment on Trustees' Duty to Account and Evidential Presumptions in Trusts

The BVI Court of Appeal has recently allowed an appeal concerning a trustee's failure to account and breach of trust.[1] The breach of trust arose as a result of the trustee making an appointment of the trust assets without considering all relevant circumstances. In overturning the decision, the Court noted that if a settlor transfers further property to the trustee, a presumption arises that such property is to be held on trust under the same terms as the original trust. Such presumption can be rebutted, but the burden of proof rests with the trustee to do so.

The case has interest for private wealth matters regardless of jurisdiction, given the popularity of the BVI when structuring assets.

Background

The deceased set up a discretionary trust during his lifetime (the "Trust"). The deceased settled US$100 in the Trust. The beneficiaries of the trust were the deceased's daughter, the daughter's family ("Zorin")[2] and the deceased's son ("Asif"). The trustee at the time of the appeal was Gany Holdings (PTC) SA ("Gany"). Asif was a director of Gany and appointer of the Trust.

Following the deceased's death, Zorin sought to have Gany account for the assets that formed part of the Trust because she believed the Trust had substantial assets. Initially, Gany refused to account. Subsequently, Gany informed Zorin that the trust also held shares in a company called European Commodities Limited ("ECL HK") but asserted these were not of significant value. Zorin still contended the Trust had substantial assets. Subsequently, Zorin was informed that the assets of the Trust were appointed out to Asif in 1998.

Zorin filed a claim against Gany and Asif. Amongst other things, Zorin sought an order that Gany be removed as trustee and Asif as appointer. Zorin also sought an order that the appointment to Asif be declared void and a further declaration that Asif be required to account for the assets which were the subject of the appointment as constructive trustee.

The High Court held that the burden of proof was on Zorin to show that Gany's account was deficient and that she had failed to do so. The Court further held that Gany had committed no breach of trust and thus declined to set aside the 1998 appointment. The Court also held that Asif was not personally liable on the basis of knowing receipt as constructive trustee.

Zorin appealed the decision in relation to several findings of fact and law including (1) that the Trust had ceased to have any significant assets; (2) that the burden of proof was on Zorin to establish the assets held by Gany were held on trust; and (3) that Gany was not under a misconception when it made the appointment to Asif.

Judgment

The Court of Appeal allowed Zorin's appeal. In doing so, the Court noted that the law is well settled in relation to when an appellate Court will allow an appeal against a trial judge's finding of fact. The Court noted that, whilst an appellate court must be cautious in overturning a finding of fact, it may do so if it is satisfied that any advantage the trial judge had by virtue of having seen and heard the evidence could not be sufficient to explain or justify the trial judge's conclusions. To this end, the Court found that the trial judge erred in his finding of fact that the Trust contained no substantial assets. Rather, there was "overwhelming evidence" before the judge that the Trust held not only the ECL HK shares, but also shares in three other companies and these were of substantial value.

Further, the Court held that judge had erred in finding the burden of proof was on Zorin to show that Gany's account was deficient. The Court noted the duty of a trustee to maintain accurate accounts is the "irreducible core minimum" of trusteeship. Applying the principles of Re Curteis' Trusts[3], the Court held that if a settlor subsequently transfers further assets to the trustees, then there is a presumption that those assets are to be held by the trustees on the same terms as the original trust. The presumption operated to mean that the shares in ECL HK and other companies were presumed to be held by Gany as trustee of the Trust. At trial, Gany did not adduce any evidence to rebut the presumption. Therefore Gany must be regarded as holding the shares on trust.

In relation to whether Gany was under a misconception when it made the appointment to Asif, the Court noted that it is settled law that the failure of trustees to consider a relevant consideration can give rise to a breach of trust. The Court also noted that a Court can invalidate the exercise of discretion by trustees where it is clear the trustees would not have acted in the way they did had they not failed to take into account considerations they should have taken into account. The directors of Gany had made the decision to appoint the assets of the Trust to Asif on the mistaken belief that Trust assets totaled US$100. In fact, balance sheets showed that ECL HK shares were worth around HK$2.7m. As such, in making the appointment the Court held that Gany acted under a misconception and the trustee failed to take into account relevant considerations. The Court held that Gany's decision was vitiated and ordered it be set-aside as void.

Comment

The case is a useful reminder of the importance a Court will place on a trustee's duty to account. Further, the case illustrates that when a trustee receives property from the settlor, such property will be presumed to form part of the Trust property. Such presumption can be rebutted. Nonetheless, the BVI Court confirmed that the burden of proof will be on the trustee to rebut.

Some aspects of the case are more problematic. The Court held that the trustee's decision to make the appointment in favour of Asif was void rather than voidable. This is contrary to the position in England, where the Supreme Court has held that the rule allowing the Court to vitiate a trustee's decision if such decision was made not taking into account all the relevant circumstances renders the decision voidable.[4] The BVI Court gave no reason for this distinction. Further, the BVI Court ordered that Gany be removed as trustee. This was done without the Court explaining their reasoning. As such, the decision contains little guidance for BVI trustees as to when they are at risk of removal.