Rights of Outgoing Trustees Examined by Bermuda Courts

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Meritus Trust Company Limited v Butterfield Trust (Bermuda) Limited [2017] Bda LR 82

In October 2017, Chief Justice Kawaley ruled that an outgoing trustee is neither entitled to retain any part of the trust assets as security for its equitable indemnity as former trustee nor demand a contractual indemnity.

This case involved an outgoing institutional trustee who upon being removed (as opposed to having retired) as trustee of two trusts, refused to hand over sizeable trust assets or trust documents to the new trustee without first obtaining a contractual indemnity and retention of assets from the two trusts. This was against the backdrop of a potential breach of trust claim of an approximate value of $5 million. The trust deeds did not confer any express retention or contractual indemnity rights on the former trustee.

Prior to the hearing, the outgoing trustee agreed to provide the requested trust documents. The hearing then focused on the “main” issue of retention of funds and the “subsidiary” issue of the outgoing trustee’s entitlement to a contractual indemnity.

The Chief Justice accepted Meritus’ argument that an outgoing trustee’s right of indemnity in equity, putting aside any more generous rights conferred by a statute, contract or a particular trust deed, took effect as a non-possessory lien and did not include a right of retention as against a successor trustee, in contradistinction to the position of a beneficiary or creditor of a trust. The case analysis focused on the one case (Lemery Holdings Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344) from New South Wales which addressed head-on the question of whether a trustee’s right to indemnity included a right of retention which could be asserted against a new trustee. Of the English case law, Re Pauling’s Settlement Will Trusts (No.2) [1963] 1 All ER 857 was found to provide no real support at all for a right of retention under the general law. X v A [2000] 1 All ER 490 was found not to directly address the right of retention at all.

The Chief Justice accepted that the above analysis is consistent with the statutory framework for changing trustees which requires all trust assets to be vested in the new trustee upon appointment or as soon as possible thereafter.

The practical position was summarized as follows:

  • As regards those trust assets which automatically vest in the new trustee upon appointment (cash but excluding shares or stocks), the right of retention is lost as against the new trustee by operation of the law;
  • As regards those trust assets which do not automatically vest, the former trustee can seek to postpone his statutory obligation to immediately vest them. This could happen either by agreement or with discretionary assistance from the Court, but it would be the only principled basis for obtaining legally valid retention rights against the new trustee.

With regard to the subsidiary issue of a contractual indemnity, the outgoing trustee cited no authority to support the proposition that the Court had jurisdiction to compel the new trustee to negotiate and consummate an express contractual indemnity. Neither the trust deeds nor legislation conferred any such entitlement. The wording of the trust deeds merely preserved the ability to seek a contractual indemnity – not to demand one.

As a result of this case, trustees who have been removed would be wise to carefully consider their steps post transfer. Further outgoing trustees should not assume that they will receive contractual indemnities upon request if the deed is otherwise silent on the point. Those drafting trust deeds should pay specific attention to the protections granted to outgoing trustees.

MJM successfully acted for the plaintiff in this case.

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