Guernsey Law Reports 2007–08 GLR 240
IN THE MATTER OF THE V SETTLEMENT
ROYAL COURT (Talbot, Lieut. Bailiff and Jurats): January 28th, 2008
Trusts—powers and duties of trustees—application for directions—may apply under Trusts (Guernsey) Law 1989, s.62 for approval of court for decision already taken on exercise of discretion under trust deed—appropriate if decision of “momentous nature” substantially affecting trust assets—court to be satisfied that lawful exercise of trustee’s powers and one that ordinary, reasonable and prudent trustee, properly directed, could properly take
Trusts—powers and duties of trustees—loan to beneficiary—if express power to make loan to beneficiary, trustee may apply under Trusts (Guernsey) Law 1989, s.62 for court’s approval of proposed details—may approve small loan from large trust fund to pay bills of legal advisers for interpreting and contesting deeds of appointment made under trust, thus avoiding bankruptcy and threat to capital assets
The trustee of a Guernsey trust sought the approval and authorization of the court to make a loan to the principal beneficiary.
The settlor’s son was the sole living member of the class of beneficiaries under the trust, the class having closed on the death of his father in 1994. He was entitled to the whole of the net income of the trust (which amounted to about £270,000 a year), the capital of about £14m. being held upon accumulation and maintenance trusts for his children and remoter issue.
Various deeds of appointment had been made under the trust in 2002 and 2003, which raised complex questions of construction and validity, resulting in a dispute between the son and other members of the settlor’s family (notably his widow), making extensive legal work necessary in England and Guernsey to avoid litigation. Negotiations stalled when the son was no longer able to fund his lawyers and the outstanding legal costs totalled just over £260,000. It was clear that unless these bills were paid in full, the son’s solicitors in England and advocates in Guernsey would cease to act for him and bring proceedings against him for payment.
The trustee had the power under the trust to “lend the whole or any part of the trust fund to any beneficiary upon such terms as to repayment and interest (or interest free) . . . as [it] shall . . . think fit.” It therefore resolved to make the son a loan of £260,000 for no more than four years on an
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interest-free basis, secured on his freehold property in England, and made the present application under the Trusts (Guernsey) Law 1989, s.62 to secure the court’s approval.
Held, granting the application:
(1) The court would give the approval sought. This was one of the types of case in which, although the trustee had authority under the trust deed to exercise its discretion to make a loan to the son, it regarded the exercise of its discretion as one of a “momentous nature” and it was therefore appropriate for it to seek the blessing of the court for the way it proposed to act (para. 32).
(2) The court did not need to say how it would itself exercise the discretion but merely that it was satisfied that making the loan would be a lawful exercise of the trustee’s power and that the decision to do so was one which an ordinary, reasonable and prudent trustee, properly instructed, could properly have made. It was for the son’s benefit and that of the trust estate. The court was satisfied that he had large debts and, although he was the sole beneficiary of the income under the trust, he could not pay those debts without the assistance of the loan. If he were to be sued by his legal advisers for their fees, there was a genuine risk that he might be declared bankrupt and it might also be difficult for him to secure replacement legal representation. There was also a real risk that bankruptcy would threaten the security of his family homes, which were part of the trust’s capital assets and were also the home of his daughter and the proposed homes of any other children he might have in the future (paras. 32–35).
(3) The security proposed for the making of the loan was satisfactory, the son himself agreed to the use of that security, and the sum to be lent was relatively small in the context of a trust fund of £14m. There was a distinct hope that the disputes as to the construction of the deeds of appointment could be resolved if the son’s lawyers continued to represent him and, since all the parties supported the application, that family harmony might be restored (para. 36).
Cases cited:
(1) H Trust, In re, 2007–08 GLR 118, dicta of Talbot, Lieut. Bailiff applied.
(2) Public Trustee v. Cooper, [2001] W.T.L.R. 901, referred to.
(3) RSPCA v. Att. Gen., [2002] 1 W.L.R. 448; [2001] 3 All E.R. 530, followed.
(4) Richard v. Mackay (1987), 11 Tru LI 23, dicta of Millett, J. applied.
(5) Rysaffe Trustee Co. (C.I.) Ltd. v. Hexagon Trust Co. (C.I.) Ltd., Royal Ct., Judgment 52/2004, November 2nd, 2004, unreported, dicta of Carey, Bailiff applied.
(6) S Settlement, In re, 2001 JLR N [37], followed.
(7) X v. A, [2006] 1 W.L.R. 741; [2006] 1 All E.R. 952; [2005] EWHC 2706 (Ch), followed.
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M.G. Ferbrache for the trustee;
Ms. K. Le Cras for the settlor’s son;
J.M. Wessels for the settlor’s widow;
I.C. Swan for the infant daughter of the settlor’s son and any unborn or unascertained beneficiaries under the trust.
1 TALBOT, LIEUT. BAILIFF:
Introduction
On January 17th and 18th, 2008, an application came before the Royal Court under s.62 of the Trusts (Guernsey) Law 1989, seeking the approval and authorization by the court of a loan by the applicant, the sole trustee of the V Settlement). The V Settlement, which was made by the late settlor, is a Guernsey trust.
2 This judgment (which contains our reasons for the direction referred to below) is now released to the public in an anonymized form so as to preserve the anonymity of the parties, which, in our view, is in the best interests of the parties and of the V Settlement.
3 The trustee was appointed the sole trustee of the V Settlement on August 20th, 2002. It is proposed that the loan, to which this application relates, be made by the trustee to the son of the settlor under an express power contained in cl. 12(o) of the V Settlement. Clause 12(o) authorizes the trustee to—
“lend the whole or any part of the trust fund to any beneficiary upon such terms as to repayment and interest (or interest free) and otherwise as the trustees shall in their discretion think fit provided that no loan shall be made on terms that repayment shall be postponed beyond the end of the trust period.”
4 The loan to the settlor’s son (“the son”) would be of a maximum total sum, from time to time, of £260,000 and would be made for a term of no more than four years on an interest-free basis. It is clear from the affidavit evidence of a director of the trustee under the V Settlement, filed on behalf of the trustee on this application, that the loan is urgently required to meet outstanding Guernsey and English legal costs incurred by the settlor’s son over the course of these proceedings, which commenced in 2004 and which raise relatively complex questions of construction and validity relating to deeds of appointment made under the V Settlement in 2002 and 2003. Details of the issues in these
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proceedings are helpfully summarized in para. 8 of the skeleton argument lodged on behalf of the trustee.
5 The director’s evidence, and that of the son himself, establish to our satisfaction that, unless the loan is made in the very near future, his English solicitors and Guernsey advocates will both cease to act for him and sue him for the large sums, amounting in total to just over £260,000, outstanding in their books as costs due to them from him. The affidavit evidence was amplified by invoices produced to us by the son’s counsel, Advocate Karen Le Cras, which disclosed full details of her firm’s costs, but very substantially fewer details of the larger costs incurred on his behalf by the son’s English solicitors. No issue arose on this application about the liability of the son to his lawyers to meet their costs or about the size of their bills.
6 The application was self-evidently an urgent one, and, during a telephone directions hearing held by the Lieutenant Bailiff on January 9th, 2008, arrangements were made for an early hearing date.
7 This judgment contains our reasons, in summary form, for deciding, as we announced in court on Friday, January 18th, 2008, that we approved and authorized the making of the loan by the trustee to the son on the terms of a draft loan agreement, to which reference is made below, and that we would direct the trustee accordingly pursuant to s.62 of the Trusts Law.
8 Except where an issue is a pure matter of law (which is, of course, solely the responsibility of the Lieutenant Bailiff as the presiding judge to decide) this is the judgment of the court, including the Jurats.
Procedure on this application
9 In In re H Trust (1), the Lieutenant Bailiff said (2007–08 GLR 118, at para. 4):
“Adopting the procedure outlined by Carey, Deputy Bailiff (as he then was) in the application of Kleinwort Benson (Trustees) (Guernsey) Ltd. in In re W’s 1966 Settlement . . . under which the presiding judge and the Jurats retire together to reach, if they can, a common mind as to how the court’s discretion in particular cases involving the supervision of, or intervention in, Guernsey trusts should be exercised, we retired together to consider the principal application. I decided that this procedure was suitable for an application to the Royal Court . . . for the approval of an arrangement to vary a Guernsey trust under the express statutory power given to the court in s.52 of the Trusts Law.”
10 On January 18th, 2008, the Lieutenant Bailiff announced that he had decided to use the procedure mentioned in the judgment in In re H Trust
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on this application by the trustee for directions under s.62 of the Trusts Law and that he would retire with the Jurats to consider the application at the end of counsel’s argument. Counsel agreed that this application was suitable to be dealt with by the court on this basis and so the court retired together to consider and decide this application.
Jurisdiction
11 On this application, the direction of the court approving and authorizing the proposed loan to the son was sought by the trustee under ss. 62 and 63 of the Trusts Law, which, in so far as is material to this application, read as follows:
“Applications for directions
62. A trustee may apply to the court for directions as to how he should or might act in any of the affairs of the trust, and the court may make such order as it thinks fit.
General powers of court
63. (1) On the application of any person mentioned in subsection (2), the court may—
(a) make an order in respect of—
ii(i) the execution, administration or enforcement of a trust;
i(ii) a trustee, including an order as to the exercise of his functions . . . ;
(iii) a beneficiary, or any person connected with a trust;
(iv) any trust property, including any order as to the vesting, preservation, application, surrender or recovery thereof . . .
(2) An application under subsection (1) may be made by . . . a trustee . . .”
12 The application before us on January 17th and 18th, 2008 was, as we have said above, made by the trustee, a legal person in one of the categories named in s.63(2) of the Trusts Law. Advocate Mark Ferbrache represented the trustee and made helpful written and oral submissions to us.
The V Settlement
13 The V Settlement was formed by a deed of settlement dated August 22nd, 1989 and made between the settlor and the original trustee.
14 The son, who was born on July 19th, 1978, is the sole member of the class of “the beneficiaries” defined in cl. 1(g) of the V Settlement. The class closed on the death of the settlor on October 6th, 1994.
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15 In summary, the son is presently entitled to the whole of the net income of the V Settlement and the capital is held upon trust for the son’s children and remoter issue on accumulation and maintenance trusts of a form which is often encountered by the court. The V Settlement includes other important trusts and powers, which it is not necessary for us to mention on this application, but which are central to the principal applications in these proceedings. These terms of the V Settlement, which might be material to the main part of these proceedings, are helpfully set out in the trustee’s counsel’s skeleton argument.
16 The principal application, which is still standing as a “live” application in the lists of the Royal Court, was made in 2004 in relation to the deeds of appointment made in 2002 and 2003, which we have mentioned briefly in para. 4 above. Issues remain unresolved as to the validity of those deeds and over a long period of time the parties have been involved in attempts, through their Guernsey and English lawyers, to resolve these issues without a full hearing in court. If such attempts, however, fail, the application is likely to be listed for hearing within the next few months.
17 The director’s third affidavit, and the trust accounts to April 5th, 2007 exhibited thereto, established that the funds and other assets, including land, subject to the V Settlement were valued as at April 5th, 2007 at about £14m.—the fixed assets being valued at cost—and that the distributable income, to which the son is presently entitled, amounted in the year to that date to approximately £270,000.
18 At the present time the son (on whose behalf we were addressed by Advocate le Cras in commendably brief and well-directed written and oral submissions) is married and has only one child, a daughter, who was born in 2006.
19 The son’s daughter was represented on this application by Advocate Ian Swan, who made helpful written and oral submissions to us on her behalf, and also on behalf of any future or unascertained beneficiaries of the V Settlement. Advocate Swan’s oral submissions ensured that any arguable points adverse to the trustee’s application were rehearsed before the court, but the thrust of his submissions was that he supported the application.
20 The settlor’s widow is one of the ultimate default beneficiaries of the V Settlement, and she was represented before us by Advocate Jeremy Wessels. He, understandably, had very little to add to the submissions of other counsel, but he told us that his client also supported the trustee’s application.
The question for determination by the court
21 The large outstanding amount of costs claimed by the son’s lawyers both here and in England has apparently built up both during the principal
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proceedings in this court and, perhaps primarily, in the course of the negotiations towards resolving the outstanding issues between the parties. These negotiations, it seems, stalled when the son became unable to continue funding his lawyers to conduct them on his behalf, and the lawyers decided not to act without further funding from their client.
22 On the basis of the director’s second, third and fourth affidavits, we found that it was clearly established that the trustee had decided by about January 18th, 2008, the date of the director’s fourth affidavit and the second day of the hearing, that it wished, in the exercise of its express power under cl. 12(o) of the V Settlement, to make the proposed loan to the son on the security of his freehold property in England, and on the other terms set out in the draft loan agreement attached to the application dated January 17th, 2008 (subject to one minor drafting amendment made during the oral hearing on January 18th, 2008).
23 It was for us to decide whether or not we were satisfied that it was right to approve and authorize the making of the proposed loan. In some of the English cases in this area of trusts law, this is referred to as the court “blessing” an exercise by a trustee of its powers in the way in which it has decided it would wish to exercise them.
The law in Guernsey
24 In this application the trustee has not in any sense surrendered its discretion to the court, but has decided that it wishes to exercise its express power of making a loan to the only member of the class of the beneficiaries, namely, to the son, and seeks the authorization, or the “blessing” of the court for the action which it has decided it should take—see especially in Underhill & Hayton, Law of Trusts & Trustees, 17th ed., art. 87, at 1024–1040 (2006).
25 In delivering the judgment of this court in Rysaffe Trustee Co. (C.I.) Ltd. v. Hexagon Trust Co. (C.I.) Ltd. (5), Carey, Bailiff said:
“. . . [D]iverting to the law, we have had the benefit of having quoted to us a decision of Mr. Justice Hart in the case of Public Trustee v. Cooper [now reported in [2001] WTLR 901]. In that judgment the learned judge quotes from a chambers judgment of Robert Walker, J., as he then was, given in 1995, in which he identifies the various categories of application that will be made to the court by trustees. We accept . . . that this is a case where it is appropriate for an application to be made to this court in the situation that trustees have already decided how to exercise their powers, but where they wish to obtain the blessing of the court for the action which they have resolved to take. As the judgment outlines, sometimes these applications will be made because of the momentous nature of the decision, such as selling a family estate. There can be other situations, as there
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are here, where the court, without accepting a surrender of the discretion of the trustees, can reasonably be asked to say to the trustees that in the light of potential conflict of interests, it approves the way in which the trustees propose to deal with a matter. Accordingly, we are being asked to give the court’s blessing to the compromise proposed.”
26 In addition to the help which we get from that case, we have also found considerable help in some recent English cases on the proper formulation of the approach to be taken to the trustee’s application, and we have followed the approach taken both here in Guernsey and in England. We found that approach persuasive and readily followed it.
27 It is clear from Richard v. Mackay (4) (11 Tru LI 23, at 24, per Millett, J.), RSPCA v. Att. Gen. (3) ([2002] 1 W.L.R. 448, at para. 31, per Lightman, J.) and X v. A (7) ([2006] 1 W.L.R. 741, at paras. 27–30, per Hart, J.) that (as the learned editors of Underhill & Hayton put it (op. cit., at para. 87.9))—
“the task of the court here is not to say how it would itself exercise the discretion, but merely to ensure (via an inquisitorial process) that the proposed exercise is lawful in the sense that the trustees can properly form the view which they have. The consequence of the court being so satisfied is that the beneficiaries will be deprived of the opportunity to allege that it constitutes a breach of trust, and thus the court will act with caution.”
28 It is also important to remind ourselves, as Millett, J. said in Richard v. Mackay (11 Tru LI at 24), that the task of the court is—
“. . . to ensure that the proposed exercise of the trustees’ powers is lawful and within the power and that it does not infringe the trustees’ duty to act as ordinary, reasonable and prudent trustees might act, but it requires only to be satisfied that the trustees can properly form the view that the proposed transaction is for the benefit of beneficiaries or the trust estate.”
Dealing with this application
29 There is no doubt that the trustee has an express power granted by cl. 12(o) of the V Settlement to make an interest-free loan to the settlor’s son, the only member of the class of “the beneficiaries.” The making by the trustee of the proposed loan, on the security of the son’s freehold English property (which has been professionally valued at £540,000 subject to the rights of its present occupant, the son’s grandmother) would, therefore, be a lawful exercise of the express power to lend part of the funds of the V Settlement, in the sense that the express power clearly envisages the making of such a loan.
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30 We therefore turn to consider whether or not the proposed loan would infringe the trustee’s duty to act as an ordinary, reasonable and prudent trustee, and whether or not it would be for the benefit of the beneficiaries or the trust estate. In doing so, we remind ourselves that this application is made under s.62 of the Trusts Law, and, in particular, that it is not an application under s.52 of the Trusts Law for the approval on behalf of the infant daughter of the settlor’s son and unborn or unascertained beneficiaries of a variation of the V Settlement (in which type of application we would have had to have been satisfied that the proposed loan was for the benefit of such beneficiaries).
31 The approach which we have taken on this application is, therefore, in accordance with the guidance of Rysaffe Trustee Co. (C.I.) Ltd. v. Hexagon Trust Co. (C.I.) Ltd. (5) and of the English cases to which we have referred above, and we note as well that the Royal Court of Jersey has taken the same approach, relying especially upon Public Trustee v. Cooper (2), in In re S Settlement (6).
32 We were satisfied that the opinion which the trustee formed, i.e. that it should exercise its discretion under cl. 12(o) of the V Settlement to make the proposed loan to the son, was one which an ordinary, reasonable and prudent trustee properly instructed could have properly formed and we therefore granted the direction requested to the effect that the loan was approved and authorized by the court. In the light of the dispute, primarily between the son and his mother, which underlies these proceedings, we understood why the trustee had not made the proposed loan without the direction of the court and why it had come to the court for its blessing. We accepted, as was said in para. 19(c) of the trustee’s counsel’s skeleton argument, that the trustee regards the making of the proposed loan as “particularly momentous,” and we were satisfied without difficulty that the trustee could, in all the circumstances, have properly come to the view that the proposed loan to the son was for his benefit, as the sole member of the class of “beneficiaries” under the V Settlement, and of the trust estate.
33 Our reasoning was as follows. It was established to our satisfaction that the son had large debts, including (i) a very large debt owed, in due course, to the trustee (and which may or may not be secured on property occupied by him in a country in North Africa), and (ii) the large debts of just over £260,000 owed to his Guernsey and English lawyers. We accepted that, whilst he enjoyed the full net income resulting from the investment of the trust funds, he could not meet his debts without receiving the loan and that, if he were to be sued by his lawyers for their fees, judgment would be granted against him for the total sum and that there would be a very genuine risk that he would be declared bankrupt, probably in England. We also accepted the submission that in such circumstances it would be likely to be difficult, if not impossible, for the
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son to obtain the services of replacement English and Guernsey lawyers to assist both him and the court in these proceedings.
34 We also considered that, although the son’s bankruptcy might, subject to the arguments about validity of the deeds of appointment, produce the result that 90% of the net income of the V Settlement would be withheld from him for the benefit of those entitled under those deeds and under the V Settlement, including the son’s own young daughter, there would be a real chance of both his English and his North African properties being used to pay his creditors, thereby risking the family homes—which, of course, are also the homes of the son’s daughter—and the future homes of any other children who may, in the future, be born to the son and his wife. We thought, therefore, that the son’s immediate family would be likely to be adversely affected by his bankruptcy.
35 We add that we were also persuaded (although we repeat that we did not, as a matter of law, need to be so persuaded) that the proposed loan would be in the ultimate best interests of the son’s daughter, and of others represented by Mr. Swan. We readily agreed with the submission in para. 12 of his skeleton argument, which we regarded as being made particularly well, that—
“the principal benefit to the minor and unborn beneficiaries in the loan being made is that it is hoped that this will enable [the son] . . . to engage actively in resolving the present dispute between the adult beneficiaries. The dispute not only promotes disharmony within the family, but is also likely to run up yet further costs, a part of which at least will come out of the trust assets, thus diminishing the assets available for distribution. If an acceptable compromise of the dispute, which is in the interests of the minor and unborn beneficiaries, can be found then this can only be a good thing. [The son’s] inability to meet his legal bills is at present preventing further exploration of issues crucial to the resolution of that question.”
36 We also took into account as factors which a trustee in the position of the trustee could properly consider as a reason to make the loan, that the English property of the son appeared to amount to strong security for it, that the son himself agreed to the using of that property as such security and that the capital sum to be loaned to the son was not particularly large in the context of a trust fund valued at about £14m. Advocate Le Cras, in our view, also correctly summarized the position that the proposed loan would be in the son’s best interests as a beneficiary in this way in para. 7 of her skeleton argument:
“It is clearly in the best interests of [the settlor’s son] as a beneficiary that the loan be made to permit him to pay his outstanding legal fees, with the result that (a) any prospect of bankruptcy is avoided; (b) the dispute as to the construction of the deeds of appointment can be
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resolved; (c) the significant amount of fees incurred in resolving the dispute [is] not wasted; and (d) family harmony is restored.”
37 We also accepted that it was more likely than not that, if the main proceedings were to be resolved between the parties, subject to the approval of terms of settlement on behalf of those represented by Mr. Swan, the costs incurred on behalf of the son would be ordered to be paid out of the trust fund on the indemnity basis.
38 All other counsel, therefore, supported the trustee’s application. We readily came to the conclusion that it should be granted. Equally readily, the Lieutenant-Bailiff ordered, in accordance with usual practice in proceedings relating to the validity of trust documents, that the costs of this application of all parties should be paid out of the trust fund on the indemnity basis. We express our thanks to all counsel for their assistance in this matter.
Application granted.
2009
Law Report
None
Guernsey Law Reports 2007–08 GLR 240