04 May 2020

Bermuda’s approach to defective trustee appointments

The C Trust (the Trust) was established in 1965 for the benefit of the Family. The Trust’s terms provided that the protector held the power to appoint trustees. Certain beneficiaries (the Family), erroneously believing they had power to appoint trustees in place of the two protectors identified in the trust deed, invalidly sought to exercise the power. This led to a chain of invalid appointments over 20 years and had potentially significant consequences for the Trust’s administration.

The C Trust's[1] assets included controlling interests in holding companies that owned trading entities in Africa, employing a substantial workforce. Reconstituting trust records would have had an enormous drain on trust resources.

The position of ‘trustees de son tort’ or ‘de facto trustees’ was summarised by Mann J in Jasmine Trustees Ltd v Wells & Hind:[2]

‘He will be liable for breach of trust much as a properly appointed trustee […] The trustee de son tort will be obliged to hold the property for, and to account to, the beneficiaries, but on the other side of  the coin will not have the powers of the trustee conferred by the settlement…’

Orders sought

The plaintiff sought orders that it be appointed trustee under s.31(1) of Bermuda’s Trustee Act 1975 (the Trustee Act), and manage the Trust’s assets on the basis that it originally had been validly appointed.

Appointment as trustee

Section 31(1) of the Trustee Act provides that:

‘The Court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient, difficult or impracticable to do so without the assistance of the Court, make an order appointing a new trustee or new trustees either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.’

Hargun CJ held that a Court appointment under s.31(1) was the only option for appointment of new trustees in the circumstances and that ‘expediency’ under s.31(1) means ‘expedient for the trust as a whole’. The Court also held that there was no benefit to allowing the Trust to operate without a validly appointed trustee and that it was expedient to order that the plaintiff be appointed as trustee on the date of the order.

The Court’s approach to actions of de facto trustees

Hargun CJ recognised that granting the orders sought would not ratify the plaintiff’s actions as de facto trustee as there was no suggestion of bad faith by the plaintiff and its defective appointment resulted from a lack of a clear understanding of the Trust’s terms.

He also held that the Trust had numerous adult, minor and unascertained beneficiaries, and the task of reconstituting Trust’s records was not in the beneficiaries’ interests.

Hargun CJ accepted that:

‘… the Court has an inherent jurisdiction to intervene in the administration of a trust and to approve certain acts on the part of the trustees and/or authorise trustees to do certain things which are an effective departure from the terms of the trust where it is not possible to obtain the consent of all the beneficiaries because they are not all sui juris.’

The Court relied on the following cases:

  • Re New,[3] which recognised the jurisdiction as part of the general administrative jurisdiction of the court, considered the limits of the jurisdiction ought not be expressly limited, but that the jurisdiction should be exercised with great caution;         
  • In the Matter of the Z Settlement,[4] whereby the Royal Court of Jersey (the Royal Court), with the benefit of Lynton Tucker QC’s opinion, held that the Royal Court, exercising its inherent jurisdiction, may confirm the acts or omissions of trustees that may not have been authorised by directing that the trustee take no action in respect thereof; and
  • Schmidt v Rosewood Trust Limited,[5] whereby the UK Privy Council confirmed the court’s inherent jurisdiction to intervene in trusts’ administration to secure the trust’s competent administration.

Hargun CJ concluded that the Court, exercising its inherent jurisdiction, may order that the plaintiff leave undisturbed acts or omissions of previous trustees, when the validity of their appointment may be in issue. He noted that the order would not prejudice the beneficial class because it would not operate to relieve the plaintiff from liability for prior conduct beyond the Trust’s exoneration provisions. The result is that the Trust can be administered on the same footing as though the administration had been undertaken by duly constituted trustees.

Rectification

The plaintiff did not seek orders for rectification of the defective deeds of appointment and retirement of trustees.

An order for rectification might have had the consequence of not only retrospectively validating a person’s appointment as trustee, but also the person’s subsequent exercise of trustee powers.

Rectification was considered in the Jersey case of In the matter of the D Retirement Benefit Trust.[6]

The Royal Court noted that rectification is a discretionary remedy and it had to be satisfied that:

  • as a result of a genuine mistake, a document did not carry out the parties’ true intentions;
  • there was full and frank disclosure to the Royal Court; and
  • there was no other practical remedy.

The Royal Court refused to rectify the applicable deed because the party to the deed, who actually had the power to appoint trustees, could not be imputed with intention to exercise a power that it did not know it had, and there was another remedy available: ratification.

Ratification

The plaintiff did not seek orders for the ratification of unauthorised actions of the de facto trustees.

In In the matter of the D Retirement Benefit Trust, the Royal Court ratified the de facto trustees’ actions under art.51 of the Trusts (Jersey) Law 1984 or the court’s inherent jurisdiction. However, this decision has been criticised, partly because the trust’s terms did not provide the trustees with a power to ratify past acts (which were otherwise invalid) and the Royal Court does not have the power to rewrite trust instruments to insert a retrospective power of ratification.[7]

In Re IMK Family Trust,[8] the Royal Court held that it had no jurisdiction to alter the terms of a trust under art.51, or its general supervisory jurisdiction.

In In the Matter of the Z Settlement, the Royal Court noted Lynton Tucker QC’s views that there are serious concerns about the court’s power under its inherent jurisdiction to ratify purported exercises of dispositive powers by de facto trustees as this effectively involves a variation of the trust’s dispositive provisions. It also stated that ratification may have adverse tax consequences, e.g. in that case, it might encourage Her Majesty’s Revenue and Customs to contend that the Royal Court has approved certain actions that took place in England, thereby generating UK tax consequences.

Section 47

Although not argued in In the matter of the C Trust, Bermuda may have an additional option unavailable in other jurisdictions.

Section 47 of the Trustee Act authorises the Court to grant trustees the power to enter transactions (when they would not otherwise have had the power) where it is expedient, even when all of the beneficiaries are not sui juris. There are numerous examples of the Court exercising the power to enable trustees to vary trusts’ dispositive provisions.[9]

Francis Tregear QC raised the possibility that a trustee may be able to ask the Court to exercise its authority under s.47 to give trustees the power to confirm acts they have performed while as de facto trustees.[10]        

Conclusions

The decision in In the matter of the C Trust demonstrates the Court’s pragmatism when asked to restore control and avoid the chaos that may arise from defective trustee appointments.

It will be interesting to see whether s.47 of the Trustee Act might be deployed in future Bermudian cases concerning defective trustee appointments.

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[1] [2019] SC (Bda) 44 Civ

[2] [2008] Ch. 194

[3] [1901] 2 Ch 53

[4] [2016] JRC 048

[5] [2003] 2 AC 709

[6] [2011 JLR 672]

[7]  See in particular article by D. Hagen and Br. Lincoln, ‘What’s past is prologue, or is it? Re the Representation of BB and its  consequences’, Trusts & Trustees (Vol19 No5), June 2013, pp469-474.

[8] [2008] JRC 136

[9] See, in particular GH v KL  [2011]SC (Bda)  23 Civ

[10] Francis Tregear QC, ‘Putting it right: remedying problems arising from defective trustee appointment’, Trusts & Trustees (Vol19 No5), February 2013, pp23-30

 

Ashley Fife co-authored this article with Randall Krebs of Harbour International Trust Company and Alex Whittaker of Rawlinson & Hunter, Bermuda. It was originally published in the STEP Journal, April 2020.

© Carey Olsen 2020.

Carey Olsen Bermuda Limited is a limited liability company incorporated in Bermuda and approved and recognised under the Bermuda Bar (Professional Companies) Rules 2009. The use of the title "Partner" is merely to denote seniority. Services are provided on the basis of our current terms of business.