Guernsey Court of Appeal allows a beneficiary to terminate a trust and receive the trust assets, despite there being a power to appoint further beneficiaries under the trust deed

The case of Rusnano Capital AG (in liquidation) v Molard International (PTC) Limited and Pullborough International Corp [2019] GRC 011 concerns a Guernsey trust, which was settled pursuant to a trust deed dated 25 July 2014 (the “Trust”). Under section 53(3) of the Trusts (Guernsey) Law, 2007 (the “2007 Law”), beneficiaries are able to require the trustee to terminate the trust and distribute trust property to the beneficiaries, “where all the beneficiaries are in existence and ascertained”. This is generally regarded as the codification of the rule in the English case, Saunders v Vautier (1841) Cr & Ph 240 (the “Saunders v Vautier Principle”).

As the sole beneficiary named in the Trust instrument, Rusnano Capital AG (“Rusnano”) brought an application for an order that the Trust be terminated and the Trust assets be distributed to Rusnano. However, the application was contested by the Respondents (the Trustee and the Appointer), on the basis that there was a continuing power under the Trust instrument for the Appointer to add beneficiaries. The Respondents submitted that the continuing power meant that the class of beneficiaries was not closed and therefore the Trust could not be terminated. This was argued on the basis of further English case law relating to the application of the Saunders v Vautier Principle.

However, at first instance, the Royal Court granted the application, placing an emphasis on the principles of statutory interpretation. The court did not follow the English authorities, but instead drew a distinction between the current beneficiary under the Trust and the power to add further beneficiaries. The court held that at the relevant time Rusnano was the sole beneficiary, therefore Rusnano was entitled to terminate the Trust under Section 53(3) of the 2007 Law.

The decision was appealed by the Respondents, but it was upheld by the Court of Appeal. In its judgment, the Court of Appeal added that a court has discretion under Section 53(4) of the 2007 Law to override the termination of the trust, if it thinks this would be appropriate (for example, given the intentions of the parties at the time the trust was settled). The question of whether the court should exercise this discretion in the case of Rusnano was referred back to the court of first instance, as this point had not been decided.

Further analysis of the decisions is set out below.

Background

Rusnano is an entity within a group that invests in nanotechnology. Rusnano invested in an English technology company, Pro Bono Bio PLC (“PBB”) through a trust structure. The shareholding of PBB was held through the Trust and the Respondents (the Trustee and the Appointer) were both incorporated in the British Virgin Islands to perform functions in relation to the Trust.

Under the Trust instrument, a “Beneficiary” was defined as the persons described in Schedule 4 and any persons subsequently added to the class of beneficiaries. Schedule 4 of the Trust instrument only contained the name of Rusnano. However, under Clause 7 of the Trust instrument the Appointer had the power to add beneficiaries.

Judgment of the Royal Court

As the sole beneficiary named in the Trust instrument, Rusnano brought an application under Section 53(3) of the 2007 Law for an order that the Trust be terminated and the Trust assets be distributed to Rusnano. Section 53 of the 2007 Law states (emphasis added):

“53(1) On the termination of a trust the trust property shall, subject to subsection (2), be distributed by the trustees within a reasonable time in accordance with the terms of the trust to the persons entitled thereto.

(2) The trustees may however require that they be provided with reasonable security for liabilities (existing, future, contingent or otherwise) before so distributing the trust property.

(3) Without prejudice to the powers of the Royal Court under subsection (4), and notwithstanding the terms of the trust, where all the beneficiaries are in existence and have been ascertained, and none is a minor or a person under legal disability, they may require the trustees to terminate the trust and distribute the trust property among them.

(4) The Royal Court, on the application of any person mentioned in section 69(2), may –

(a) direct the trustees to distribute, or not to distribute, the trust property, or

(b) make such other order in respect of the termination of the trust and the distribution of the trust property as it thinks fit.”

The application was contested by the Respondents on the basis that Section 53(3) is the codification of the Saunders v Vautier Principle, and further English authorities require the class of beneficiaries to be closed in order for a trust to be terminated. In the Rusnano case, the Respondents submitted that the wording “where all the beneficiaries are in existence and have been ascertained” should be read to include existing beneficiaries and all potential beneficiaries. Therefore, the power to add further beneficiaries meant that the class was not closed and the Trust could not be terminated.

The court considered this, but ultimately held that the correct approach was to give effect to the statutory regime that operates in Guernsey, “using the definitions found in the 2007 Law itself and giving the other words their meanings through applying usual principles of statutory interpretation” (paragraph 15). It was stated that authorities from other jurisdictions which relate to the interpretation of the Saunders v Vautier Principle are not necessarily relevant.

The court held that the wording in the provision, “all the beneficiaries”, should be read to include all existing beneficiaries; if the intention was to also include potential beneficiaries, the provision would have included wording to this effect. The court also drew a distinction between the existing beneficiaries of a trust and the power to add beneficiaries. When doing so, the court referred to the following paragraphs of the judgment in re Exeter Settlement 2010 JLR 169:

"29. In our judgment, one must return to first principles. A beneficiary of a discretionary trust is a person in whose favour a discretion to distribute income or capital of a trust may be exercised. Trustees may only exercise their power to distribute income or capital in favour of a person who is a beneficiary. It is the beneficiaries who are the objects of the discretionary trust. They must be sufficiently certain to satisfy the requirement as to certainty of objects.

30. A power to add beneficiaries is something completely different. It means what it says. A person who is a possible object of a power to add beneficiaries is not in fact a beneficiary unless or until the power is exercised in his favour and he is added as a beneficiary. Until that moment, the trustees may not apply income or capital for his benefit and he does not have any of the rights attached to being a beneficiary of the trust. The sole right that he has is as a possible object of the power to add beneficiaries.”

Accordingly, the application was granted on the basis that Rusnano was the only beneficiary under the Trust. The court also flagged that, in general, trustees with the power to appoint further beneficiaries should be alive to the possibility that an unperfected set of beneficiaries could take the step that Rusnano had taken under Section 53(3) of the 2007 Law to terminate the trust.

Guernsey Court of Appeal Judgment

The decision at first instance was appealed by the Trustee and the Appointer. However, the decision was upheld by the Court of Appeal on the basis of the same reasoning. When considering the issue of statutory interpretation, the Court of Appeal also observed that Section 52(c) of the 2007 Law expressly refers to those who may become beneficiaries in the future. Therefore, if it was intended the Section 53(3) should include potential beneficiaries, express wording would have been included to this effect.

The Court of Appeal also stated that it would not be possible to terminate a discretionary trust under Section 53(3) where the beneficiaries were described as “the children and remoter issue of the settlor”. As there was a possibility of remoter issue being born in the future, the beneficiaries would not all be “in existence” as required by Section 53(3). However, a discretionary trust whose beneficiaries were described as “my wife and my children, A, B and C” could be brought to end by these named beneficiaries under Section 53(3), even if there was a power to add grandchildren as beneficiaries at a later stage.

The Court of Appeal also held that Section 53(4) of the 2007 Act (unlike the rule in Saunders v Vautier) confers a discretion on the courts to override the termination of the trust under Section 53(3), if termination would not be appropriate (for example, given the intention of the parties at the time the trust was established). The question of whether the court should exercise this discretion in the case of Rusnano was referred back to the court of first instance, given that the point had not been decided.

The Court of Appeal also referred to “Red Cross” trusts, where a charity is the only named beneficiary, but it is intended that the trustee will exercise its power to add further beneficiaries (for example, to include members of the settlor’s family). The court acknowledged the risk that charities in such trusts could bring an application under Section 53(3) to terminate the trust, but noted that the court had discretion under Section 53(4) of the 2007 Law to override this and prevent termination in appropriate circumstances.