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appointment and removal of trustees, fraud on a power, protector

Protector powers – fiduciary or not?

While “protectors” are not a common feature of New Zealand trusts, they are not entirely unheard of.  A protector might be described as a hybrid of a trustee and an appointor.  This is a fairly inelegant statement of the term, but hopefully it gets the idea across.  The role of the protector developed in offshore jurisdictions where it was more common for the settlor not to be a trustee and so the need arose for there to be someone to keep an eye on things.  There is no legal definition of protector and the role is as big or as small and has as many (or as few) powers as the trust deed proscribes.  The difficulty with protectors is the extent to which a protector has fiduciary obligations.

Kea Trust Company Limited v Pugachev, while turning on its own facts, provides some useful guidance as to the role of protector and the extent of fiduciary obligations a protector can owe.  In Kea Trust Company Limited the core dispute related to whether a trustee had been validly removed by a protector in circumstances where the removal instrument was signed by both the protector and the second protector (in case the protector no longer had authority due to the protector being under a disability as defined in the Declaration of Trust).

The proposition for the court was that the Protector owed fiduciary obligations to beneficiaries of the trust and that the power to remove the original trustees may have been exercised for improper purposes.

The first question to decide then was whether a person holding the position of a Protector under a trust owes fiduciary obligations.  As noted in Kea Trust Company Limited in this regard “The first port of call will always be the words of the relevant trust instrument, and the objects of the trust that can be gleaned from them and any relevant extrinsic evidence.”

As noted at [47] of the judgment (citations omitted):

“The authorities suggest that a protector may hold a particular power, either as a fiduciary or in his or her personal capacity. A useful survey of relevant authorities can be found in Re Bird Charitable Trust.The Royal Court of Jersey held that the powers to appoint additional trustees and a successor protector were fiduciary in nature and could only be exercised in good faith and in the best interests of the trust and the beneficiaries as a whole.The Court rejected a claim of fraud on the power even though the grounds supporting a decision to appoint a successor protector were argued to have been made with an improper intention of removing assets from the control of the courts in Jersey; in particular, to defeat anti-money laundering legislation.The Deputy Bailiff, giving the judgment of the Court, held that the power had been exercised in good faith and in the best interests of the beneficiaries because it was believed their interests were promoted by an ability to deal freely with assets of the trust, without having to seek consent from the police in Jersey. That was regarded as an intention that was “entirely consistent with the purposes for which the powers were conferred”.

However, regardless of whether the protector holds powers in a fiduciary or personal capacity; in the event that the powers are not executed for a proper purpose the doctrine of fraud on a power can apply. The inquiry here focusing on whether the power has been exercised for a purpose, or with an intention, that goes beyond the scope of or is not justified by the instrument creating the power.

A fraud on a power does not necessary involve conduct on the part of an appointor amounting to dishonesty or any other form of moral turpitude; rather, it means that the power has been exercised for a purpose, or with an intention, beyond the scope of, or not justified by, the instrument creating the power.  See  Lord Parker of Waddington delivering the advice of the Privy Council in Vatcher v Paull, which was adopted by the Supreme Court in Kain v Hutton.  In the latter case Tipping J observed, in a separate judgment, that a person exercising a power must act in terms of the mandate granted by the donor of the power, and must stay within the bounds of that mandate. If the exercise of a particular power is contemplated by the instrument under which the power is granted, there will be no misuse.

In Clayton v Clayton, where the “Principal Family Member” had the  power to appoint himself as sole beneficiary, the Court of Appeal held that this did not amount to a fraud on a power. Note though that in that case the writer suggests that it is not entirely clear that this is correct as the power to amend the class of beneficiaries does not necessarily permit the Principal Family Member to remove the final beneficiaries.  See An “open” letter to the Supreme Court.

In Kea the  Declaration of Trust gave the Protector the power  to “remove any existing Trustee with or without cause.” In that case the Protector had lost faith in the trustee and the Court found that in removing the trustee the Protector “cannot be regarded as having been exercised for an improper purpose. If the Protector had been a third party at arm’s length from the Pugachev family who had diverted trust assets for his or her own benefit, the position would undoubtedly be different.”

Importantly it was also noted in Kea that whether the Protector is or is not labelled a fiduciary is unlikely to affect the duty cast upon the Protector to exercise powers to promote the objects of the trust. As noted by Matthew Conaglen and Elizabeth Weaver, Protectors as Fiduciaries: theory and practice (2012) 18(1) Trusts and Trustees 1 at 19:

The paramount consideration is the settlor’s intention, as derived from construction of the trust documentation. Not only will that determine whether the protector is a fiduciary, but also what sort of a fiduciary role the protector has. As we have shown, the fiduciary label can cover a number of situations and fiduciary and personal powers can co-exist in the hands of a protector. Where the purpose and intention of the settlor was that the protector was also to be able to benefit under the trusts, the courts will usually respect that intention and not find fiduciary obligations which would disable the protector from acting in his own interest, although they might still hold that the protector owes limited or qualified fiduciary duties to consider the exercise of his powers on a regular basis. On the other hand, the cases show that powers which impinge upon the trustees’ position as ‘ultimate guardians of the trust’ are likely to be treated as fiduciary, to some degree at least, so that the court can retain a supervisory jurisdiction. We suggest that it is unlikely that the court will allow that supervision to be avoided by language purporting to free the protector from any fiduciary obligations, but, again the touchstone is always the settlor’s objectively determined intention.

The reference to the settlor’s objectively determined intention adds a layer of consideration, which requires that each case be considered on its own facts and highlights, yet again the importance of settlors turning their mind to the terms of deeds and declarations of trust.

Also see: “Putin’s banker’ lost confidence in NZ lawyer

References:

  • Kea Trust Company Limited v Pugachev [2015] NZHC 2412
  • Kea Trust Company Limited v Pugachev [2015] NZHC 2218
  • Kea Trust Company Limited v Pugachev [2015] NZHC 1960
  • Matthew Conaglen and Elizabeth Weaver, Protectors as Fiduciaries: theory and practice (2012) 18(1) Trusts and Trustees 1 at 19
  • Re Bird Charitable Trust [2008] JLR 1 (Deputy Bailiff Birt and Jurats Bullen and Liddiard) at paras 82–92.
  • Kain v Hutton [2008] 3 NZLR 589 (SC) at paras [18]–[20] (per Blanchard J for himself, Elias CJ, McGrath and Anderson JJ).
  • Mark Hubbard, Protectors of Trusts (Oxford University Press 2013) at 85–86
  • Vatcher v Paull [1915] AC 372 (PC) at 378C
  • Clayton v Clayton [2015] 3 NZLR 293 (CA). Leave to appeal to the Supreme Court has been granted (Clayton v Clayton [2015] NZSC 84) and judgments were issued on 23 March 20.  See The Supreme Court Writes Back
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