Notable Bermuda Trust Decisions of 2018

Notable Bermuda Trust Decisions of 2018

In the Matter of the X Trusts [2018] SC (Bda) 56 Civ (12 July 2018)

The trustees in this case are private trust companies which have for some years been responsible for managing trusts which control underlying assets worth billions of dollars. The beneficiaries fall into two family camps – the Y and Z branches.

The Y branch sought determination of the question as to whether the trustees should retire or remain trustees of the trusts. The Y branch was of the view that the trustees had reached firm decisions to usher in “epochal” changes to the trust structure without adequately consulting the Y branch. The principal complaint by the Y branch was that the trustees had changed the longstanding basis on which trust allocations had notionally been made by making precipitous final decisions at the prompting of the Z branch of the family. It was complained that it was no longer possible for the Y branch to have any confidence in the ability of the trustees to manage the proposed restructuring in a fair manner.

The following questions were considered by the Court.

1. What was the legal test for removal of a trustee?The Court’s inherent supervisory jurisdiction over trusts includes the power to remove a trustee where this is required for the welfare of the beneficiaries, who are entitled to have their trusts administered by proper persons.Through an analysis of English case law, it was accepted by the Chief Justice that:
   • intervention of the Court to effect the removal of a trustee has to be justified by evidence that the trustees’ continuation is likely to prove detrimental to the interests of the beneficiaries;
   • a lack of confidence or feelings of mistrust are not sufficient in themselves to justify removal unless the breakdown is likely to jeopardise the proper administration of the trust. This requires to be determined objectively – on a case by case basis having regard to the particular circumstances;
   • removal would be more likely in circumstances where there was a total abdication of duties by the trustees as determined on the facts;
   • friction or hostility between trustees and beneficiaries was not itself a reason for the removal of trustees. The trustee has to act in a reasonable way with fair and proper regard to the interests of those affected (where the interests of fixed interest beneficiaries were concerned) when deciding how a trust should be administered.
2. Did the Court have the power to require directors of a corporate trustee to resign as opposed to removing the corporate trustee where a case for removal was made out?Following an analysis of the case law the Chief Justice held that:
   • the court has no jurisdiction to direct the removal of the directors from the relevant corporate boards. That power lies with the relevant shareholders;
   • the court does have jurisdiction to indicate that it would be in the best interests of the trusts if the directors were to resign in circumstances where they have agreed to be bound by any such indication signified by the Court.

The Chief Justice then proceeded to examine the case on the facts. In objectively deciding if the breakdown is likely to jeopardise the proper administration of the trust, consideration was given to the extent to which the trusts required impartiality between the conflicting classes of beneficiaries and the extent to which the trustees made epochal changes to the trusts in a flawed and unfair manner.

Examining the specific context of this case, it was accepted that the Y branch had subjectively lost confidence in the directors’ lack of impartiality. However, the Chief Justice found on the facts of this case that the trustees were not legally required to consult, even on an “epochal” decision. While they were entitled to take into account the representations of the family branches, they were not bound to accede to them. The procedure adopted by the trustees was found not to constitute grounds for loss of confidence in the due administration of the trusts. The “proposed plan” was not found to amount to a final decision. In light of uncontested evidence regarding the prelude to the proposed plan, it could not be found that the trustees had acted rashly by expressing provisional views on a contentious topic.

The relevant facts looked at objectively were found to fall short of supporting a case for removal of the trustees and there was no basis for signifying the desirability of one or more of the directors resigning.

In the Matter of the A Trusts [2018] SC (Bda) 42 Civ (17 May 2018)

The trustees in this case sought approval for their decision to permit a company they controlled to make a substantial investment. The application was a Category (2) case as explained in Public Trustee v Cooper [2001] 1WTLR 901, as a momentous decision. The four questions to consider in this type of application (as summarised in Re ABC Trusts [2014] Bda LR 117) include:

1. Do the trustees have the power to enter into the proposed compromise?
2. Is the Court satisfied that the trustees have genuinely formed the view that the compromise is in the interest of the Trust and its beneficiaries?
3. Is the Court satisfied that this is a view which a reasonable body of trustees could properly have arrived at?
4. Does the Court consider that any of the individual trusts have any actual or potential conflict of interests, and if so, does it consider that this conflict of interests prevents the Court from approving the unanimous decision of the trustees to compromise the litigation?

It was argued that only the third of these questions was at issue here and that the opposing beneficiaries had to satisfy the Court that the impugned decisions were irrational. The court accepted the submission that as part of the process of deciding whether or not the decisions would have been reached by a reasonable body of trustees, the Court was required to have regard to whether or not the trustees had taken into account irrelevant, improper or irrational factors.

Central to the application was the legal question of how the Court should approach the expert evidence. This case involved multiple expert opinions on various aspects of the substantive merits of what was a contentious business decision as well as competing expert opinions relied upon by those opposed to the transaction. The Chief Justice found that the context of the case did not justify the trustees simply following its own experts and not “second-guessing” them. He found that it was for the trustees to satisfy the Court not merely that they had followed advice, but further that, in light of all the expert material before them and the Court, it was reasonable for them to rely on such advice.

The conflicting roles of the directors who approved the transactions also came up for debate. It was argued that if any conflicts of interest existed between the various roles played by the directors who approved the transactions, this was a reason to seek the Court’s approval for the transaction, not an automatic basis for withholding approval. Chief Justice Kawaley was guided by the principles set out in Public Trustee v Cooper and in Bray v Ford (1896) AC 41, 51-52. He further agreed with the submission that the applicable test does not require to establish definitively that conflicts actually influenced the proposed acquisition. The summary procedure that is normally followed in this type of application makes it effectively impossible for a beneficiary to definitively prove that conflicts have influenced the transaction. It is sufficient for the court to decline its authorisation on the absence of a satisfactory answer by the trustees with respect to the issue of conflict.

In a subsequent hearing on this matter, the Chief Justice considered whether the costs of experts used for the purposes of the above application should be payable out of the assets of the concerned trusts. The trustees argued that it was not necessary for the beneficiaries to instruct a “battery of competing experts” and that the beneficiaries should have been content to analyse the expert reports supplied to them by the trustees during the consultation period leading up to the application.

The beneficiaries highlighted that the Chief Justice in his main ruling had noted the utility of the opposing reports as being material. The trustees were bound to have regard to those reports and that, with respect to the minors, expert evidence was the only vehicle through which informed views could be communicated to the trustees.

In terms of general principle, the Court considered it necessary to distinguish two questions:

1. Was it reasonable for the opposing beneficiaries to retain experts to advise them in relation to the consultation process?
2. Was it reasonable for the opposing beneficiaries to retain experts for the purposes of opposing the trustees’ Court application?

The Chief Justice found that the need for beneficiaries to seek expert financial advice in relation to momentous transactions which trustees propose to enter into, will depend on the facts of each case.

Generally, it ought to be easier to justify obtaining limited advice to enable beneficiaries to meaningfully consult with the trustees in relation to a genuinely controversial transaction.

It ought to be more difficult to justify deploying expert advice for the purposes of opposing a trustee’s application unless the relevant advice potentially supports a judicial finding that the trustee has taken into account irrelevant, improper or irrational factors, or whether it has reached a decision that no reasonable body of trustees properly directing themselves could have reached.

The Chief Justice ruled in favour of the beneficiaries finding that it was reasonable for them to seek expert financial advice for the purposes of the consultation process and to deploy that advice at the approval hearing. In reaching this decision, the Chief Justice commented on the fact that there was no clear dividing line between the consultation process and the approval process. He noted the speed with which the transaction was progressed by the trustees in circumstances where the majority of the beneficiaries held deep suspicions about the influence one of the directors had over the trustees. The experts’ interaction in the lead up to court was barely distinguishable from the consultation process.

In this case the beneficiaries were entitled to recover their costs from the trusts (but were unable to prevent automatic taxation in the event costs could not be agreed).

In other circumstances, for example where a more measured consultation has taken place by trustees and there is no suggestion in the advice obtained by the beneficiaries’ experts that the trustees have taken into account irrelevant, improper or irrational factors, it seems unlikely that the experts’ costs will be paid by the trusts.

In the Matter of XYZ Trusts (No.2) [2018] (Bda) 2 Civ (10 January 2018)

Chief Justice Kawaley addressed an application dealing with a new point of construction about the meaning and effect of section 3 of the Perpetuities and Accumulations Act 2009 (“the Act”).

The Trusts being considered in this case were established prior to 2009 under Cayman Islands law and were not subject to the rule against perpetuities. After 2009 the governing law of the trust was changed to Bermuda law. In respect of one of the trusts, the trustees were concerned whether the common law relation back doctrine (that an instrument exercising a power conferred by a settlement takes its character from the original settlement) had in fact been dis-applied by Section 3 of the Act.

Following a legal and practical analysis of relation back doctrine and section 3(5), the Chief Justice Kawaley held that Section 3 does not simply dis-apply the rule against perpetuities in relation to instruments creating trust interests taking effect after the commencement of the Act (ie. after 1 August 2009) – assuming land in Bermuda is not involved. Subject to the same assumption that Bermuda land is not affected, this provision also dis-applies the rule against perpetuities in relation to instruments made post-1 August 2009 in the exercise of a power created by a pre-1 August 2009 instrument.

Notwithstanding this, the Chief Justice found that a clear case for dis-applying the perpetuity period under section 4 of the Act was made out (relying on Re C Trust [2016] SC (Bda) 53 Civ (16 May 2016) and Re G Trusts [2017] SC (Bda) 98 Civ (15 November 2017).

In the Matter of the E Trust [2018] SC (Bda) 38 Civ (23 April 2018)

This case helpfully summarised the case law addressing confidentiality in Bermuda including the comments made in the Re BCD Trust (Confidentiality Orders) [2015] Bda LR 108 and Re G Trusts [2017]SC (Bda) 98 Civ (15 November 2017) – see previous articles written on the MJM blog with respect to these cases here and here.

The trustees in this case were seeking to add a charitable foundation as a beneficial member of the discretionary class. The Court found that the circumstances of this case were appropriate for a confidentiality order. The assistance being sought was purely of a transactional nature – akin to the restructuring of a will – which would ordinarily be done privately by issuing privileged instructions to an attorney.

There was no legitimate interest that the public would have in knowing about the wealth and the vesting affairs of the settlor and her deceased husband. It was noted that an existing beneficiary (who was ordered to be served with the proceedings) together with the proposed new beneficiary, were both public international institutions. Although it was noted that the identity of these institutions did not require shielding with anonymity, the Court was mindful of the real risk that the names of these identities would assist in leading some members of the public to identify the settlor and her husband. The names of the institutions were not, therefore, identified.

This case adds to the general body of case law in Bermuda supporting confidentiality and anonymity in non-contentious trust cases.