Bermuda Trust law update

Bermuda Trust law update

In the Matter of the C Trust [2016] SC [Bda] 53 Civ was the first Bermuda case to extend the perpetuity period under the new Section 4 of the Bermuda Perpetuities and Accumulations Act 2009 (“the 2009 Act”). The amendment to Section 4 took effect in December 2015. Although prior to the amendment, the 2009 Act had already abolished the rule against perpetuities with respect to instruments taking effect on or after 1 August 2009, the rule continued to apply to trusts established under Bermuda law prior to 1 August 2009 as well as to trusts originally established in other jurisdictions (with an applicable perpetuity period or similar limitation) but now governed by Bermuda law.

Prior to the amendment, trustees or interested parties could apply to Court using Section 47 of the Trustee Act 1975 to amend a trust to vary the perpetuity period as well as other aspects of the trust. ‘Section 47’ applications require showing that the proposed variation is “expedient” to the trust as a whole. The Section 4 amendment avoids the more rigorous and costly method of dealing with perpetuities variation via a Section 47 application – the test being a weaker test than “expediency”.

This latter point was confirmed in the C Trust case which was ruled upon within 8 days of the originating summons being filed. It concerned a US$2 billion trust in which the settlor was the only current beneficiary. The settlor wished the trust to be dynastic in duration and to ensure that succeeding generations of beneficiaries would “never be spoiled” by suddenly coming into great personal wealth.
It was held that the Courts are not to be used as a “rubber stamp” in such applications and that regard must be had to the best interests of all interested parties “broadly” defined and looked as a whole.

In this case, the express consent of the settlor was affirmed through evidence. The settlor’s children who were contingent beneficiaries did not provide evidence. Justice Kawaley did, however, comment that had the interests of other actual beneficiaries been involved, direct evidence of their consent or other form of agreement or support to the application would likely be required to justify proceeding without their formal joinder. Chief Justice Kawaley was persuaded that as the extension of the trust period did not adversely impact the default beneficiary (a charity), the default beneficiary did not need to receive notice of the application.

Justice Kawaley also accepted that the fact that extending the perpetuity period of a trust will dilute the economic interests of existing beneficiaries will ordinarily be an irrelevant consideration in this type of application.

The C Trust case therefore confirms that the amended 2009 Act is a streamlined and cost effective way to effect perpetuity changes to pre 2009 trusts and trusts established in other jurisdictions. Section 47 remains an effective tool if the perpetuity period is just one of a multitude of changes to be made to a trust. Although the more restrictive “expediency” test will be utilised it is to be noted that the turnaround period of Section 47 applications is fairly expeditious and so should not be considered a deterrent from this perspective.

The issue of costs of Beddoe proceedings in the context of non charitable trusts was addressed by Justice Hellman in his 2016 ruling, Trustee L & Ors v Attorney General & Ors [2016] Bda LR 35.

The Beddoe application itself was heard in 2015. It was commenced by trustees of substantial non-charitable purpose trusts following an action brought by the son of the deceased settlor (“the Son”) that the trusts were void or alternatively that the assets transferred to the trusts should be set aside and instead form part of the settlor’s estate (of which the Son was the administrator and an heir).

The trustees sought directions from the Court in relation to what position they should take in the main action and as to the administration of the trust assets pending its resolution. It was the first time any offshore jurisdiction has considered Beddoe relief in the context of a non charitable purpose trust.
In his 2015 Beddoe ruling, Justice Hellman gave the trustees leave to defend the main action to the conclusion of the trial at first instance and granted them an indemnity from the trust fund for that purpose. He also approved the trustees’ revised proposals for the expenditure of the trust monies pending the resolution of the main action.

At the costs hearing, the issue arose as to whether a person resisting a Beddoe application was entitled to recover costs from the trust fund and whether trustees were entitled to recover costs from the person resisting a Beddoe application.
The Beddoe proceedings in this case had involved over 50 affidavits, 28 skeleton arguments and just under 2000 pages of contentious correspondence. There were 7 interlocutory summonses (6 of which were brought by the Son) giving rise to 4 hearings as well as an interlocutory appeal. The trustees estimated costs ran to tens of millions of dollars.

With respect to the trustees’ costs, it was confirmed that the trustees were entitled to recover their costs of the Beddoe application on an indemnity basis – to the extent that they do not recover those costs from the Son (ie. in the event that the Son lost the main action).
With respect to the Son’s costs, the case of In Re Buckton [1907] 2 Ch 406 was considered. This case considered the beneficiary’s entitlement to costs in three classes of cases:

(1) An application made by trustees of a will or settlement, asking the Court to construe the trust instrument for their guidance; to ascertain the interests of the beneficiaries; or to answer a question which arises in the administration of the trusts. In such instances, the costs of all parties, which are necessarily incurred for the benefit of the estate, should be paid out of the estate.

(2) An application made by the beneficiaries as a result of difficulty of construction or administration of the trust which would have justified an application by the trustees. Again the application is necessary for the administration of the trust and the costs of all parties, which are necessarily incurred for the benefit of the estate, are paid out of the estate.

(3) An application made by the beneficiaries who make claims adverse to other beneficiaries. Such litigation is adversarial in nature and, subject to the Court’s discretion, the unsuccessful party bears the costs of those whom he or she brings to Court.

Justice Hellman was persuaded that this was a Buckton class one case. Although the Son had vigorously opposed the grant of the Beddoe relief, that was not sufficient to lift the case out of that category. The judge commented that whatever the Son’s formal position in the Beddoe proceedings, he was acting the best interests of the estate which he administered as well as for his own best interests.

Referring to In Re Buckton as well as other English case law, Justice Hellman stated that a beneficiary is allowed his costs by analogy with a trustee or estate representative ie. he is entitled to his costs, charges and expenses “properly incurred”. Properly means reasonably as well as honestly incurred.
Justice Hellman then went on to consider the various stages of and issues addressed at the Beddoe proceedings in order to determine whether the Son’s participation in the Beddoe proceedings was reasonable or not and therefore allowable or not. Various costs incurred by the Son were permitted.
Allegations of criminal conduct in the form of share price manipulation had been raised by the Son and thereafter abandoned without explanation. The judge found such allegations to be without adequate foundation and the abandonment disgraceful and deserving of moral condemnation. As such the Son’s costs in this regard were disallowed and he was ordered to the trustee’s costs of meeting them.

Proceeds of crime allegations were also raised by the Son which the judge found to be irrelevant to the Beddoe application, which was not an appropriate form in which to raise them. The Son’s costs in this regard were disallowed and he was ordered to pay the Trustee’s costs on this issue on an indemnity basis.
With respect to the 6 interlocutory applications brought by the Son (one of which sought to vary a confidentiality order to permit the Son to deal with press reports in his country), Justice Hellman held that their purpose was not to further the Beddoe proceedings but rather to serve the collateral purpose of obtaining further documents for use in the main proceedings. The Son’s costs in relation to all 6 interlocutory applications were disallowed and he was ordered to pay the Trustee’s costs of each of them on a standard basis.

In summary this case establishes that all parties who have been properly joined to a Beddoe application should, absent disqualifying conduct, normally be paid out of the trust fund even if they are not trustees or beneficiaries. Vigorous opposition by a rival claimant to a Beddoe application will not deprive him of his costs.