OUTGOING TRUSTEE HAD NO RIGHT TO RETAIN TRUST ASSETS OR RECEIVE A CONTRACTUAL INDEMNITY FROM THE SUCCESSOR TRUSTEE

The Supreme Court of Bermuda has held that a trustee has no general right to retain trust assets to meet its potential liabilities when a successor trustee is appointed. The Court also held that a former trustee has no general right to receive a contractual indemnity from its successor. Instead, the former trustee's equitable right of indemnity is protected by an equitable lien over the trust property. We consider the case, Meritus Trust Company Limited v Butterfield Trust (Bermuda) Limited [2017] SC (Bda) 82 Civ (13 October 2017), in further detail below.

Background

The Defendant (the "Former Trustee") had been the trustee of two Bermudian trusts. It was replaced in December 2016 by the Claimant (the "New Trustee"). A claim had been threatened against the Former Trustee in relation to its management of the trusts and the Judge described the handover process as "somewhat prickly".

The New Trustee sought an order requiring the Former Trustee immediately to transfer to it and vest title in the assets of the two trusts. The Former Trustee argued that it was entitled to retain a portion of the assets to meet its likely costs of defending the threatened claim. It estimated these costs to be approximately $5 million. The Former Trustee also asserted that it was entitled to a contractual indemnity from the New Trustee in respect of the same liability.

The New Trustee relied on the Bermudian Trustee Act 1975 which requires all trust assets to be vested in the new trustee on appointment or as soon as possible thereafter.  It argued that a former trustee's equitable right to be indemnified from the trust was protected by an equitable lien over the trust assets, which survived transfer to a new trustee.

The Former Trustee argued that a trustee had the right to retain assets from a disposition to a beneficiary to protect its right of indemnity, and by analogy the same right should apply to a transfer to a successor trustee.

The Decision

There was no provision in the relevant trust deeds or Bermudian legislation allowing the Former Trustee to retain trust assets or requiring the New Trustee to give a contractual indemnity. The Former Trustee therefore relied on the general law to support its arguments.

The Judge considered conflicting authorities which the parties considered supported their respective cases. However he held that only one (Australian) case dealt directly with the issue of retaining trust assets: Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344. In Lemery Holdings a first instance Court in Australia set out the relevant principles of general law from which it derived its findings:

• Trustees are personally liable for debts and liabilities that they incur in their capacity as trustees.
• However trustees have a right of indemnity out of the trust assets for expenses or liabilities arising from their management of a trust.
• The right of indemnity accrues at the time an obligation is incurred.
• This right of indemnity is secured by an equitable lien over the trust assets (a proprietary interest). The lien extends to all trust assets other than those specifically excluded by the trust instrument
• The lien survives if a new trustee is appointed, and a successor trustee takes trust assets subject to the former trustee's lien.
• A trustee is entitled to retain trust property against a beneficiary until its indemnity is exercised.

These principles led the Judge in Lemery to the conclusion that there was no general right for a former trustee to retain trust assets. The Bermudian Court followed this, holding that it was consistent with the Bermudian Trustee Act 1975 which envisaged that when a new trustee is appointed, trust assets automatically vest in the successor trustee. In relation to assets that do not vest automatically (such as shares) the former trustee is subject to a mandatory obligation to perfect the transfer.

The Bermudian Court held that a transfer of assets to a beneficiary (where a trustee is entitled to retain a portion of assets to meet contingent liabilities) was not analogous to a transfer of assets to a successor trustee. The Judge noted that there is a clear practical and theoretical distinction between the two situations. A successor trustee takes assets subject to a trust, whereas a beneficiary will usually become absolutely entitled to any assets that are distributed to him. The existence of the trust was sufficient to protect the Former Trustee's right to an indemnity.

The Former Trustee's indemnity could be enforced (if necessary) by bringing a claim against the New Trustee, but did not entitle the Former Trustee to retain assets.

The Judge also held that it would be possible for a Court to exercise its discretion to order that the transfer of trust assets which did not automatically vest in a successor trustee be delayed, however in this case there was no application for the Court to exercise that discretion.

As the Former Trustee did not rely on any authority to support its contention that it was entitled to a contractual indemnity, this argument also failed.

Comment

This is an interesting case as it relates to an issue on which there is limited authority. Although the decision was based on Bermudian law, the principles on which it was decided are likely to apply across other common law trust jurisdictions, particularly as the Bermudian Court followed the reasoning of the Australian first instance Judge in Lemery.

In light of this decision trustees may wish to include provisions in a trust deed requiring any successor trustee to provide a contractual indemnity. However, this will only be possible if the trustee is involved in drafting that document. If not, the usual approach is of course to have a Deed of Retirement and Appointment (often known as a DORA). A DORA will often include an indemnity from the new trustee, with the new trustee also agreeing to obtain an ongoing indemnity from any subsequent trustee if it is replaced in future.  Indemnities from settlors can prove to be less useful.

In this case the Former Trustee did not ask the Court to exercise its discretion to make an order delaying the transfer of assets. However there may be a stronger case for asking the Court to exercise its discretion in circumstances where a successor trustee is not an independent professional.