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appointment and removal of trustees, Appointor; power of appointment, Beneficiaries, Cases, Foreign Trust, protector

Can a non-fiduciary owe fiduciary obligations?

In the Matter of the Piedmont Trust and the Riviera Trust powers of appointment and who can exercise them are an important aspect of both the management of a trust, and the very terms on which a trust is settled.  It is now generally agreed that  whether the powers are held by a trustee or a protector, or by some other persons (even the beneficiaries), are fiduciary in nature (see Protector Powers Fiduciary or Not).  However,  what are the duties imposed where say the appointor is a non-fiduciary?

A decision of the Royal Court of Jersey provides useful guidance on this point, which is perhaps not as esoteric as it might seem.  Of note too, the case in question (Representation of Jasmine Trustees Ltd) has a more direct link to New Zealand as the trustee appointment that lead to the matter was in fact a New Zealand incorporated trustee company.  Small world or what?

As trusts are coming of age in New Zealand and moving to the second generation of trustees the exercise of powers, whether held by trustees or other parties; determine who has the power to control and manage a trust.  While trustees’ duties are clear (even if not clearly understood) what are the duties of a non-fiduciary who exercises a fiduciary power?

In Representation of Jasmine Trustees Ltd the Royal Court of Jersey held that a person exercising a fiduciary power to appoint a trustee (or a protector) has a duty to:

  • act in good faith in the interests of the beneficiaries as a whole
  • to reach a reasonable decision
  • to take into account relevant matters only
  • not to act for an ulterior purpose

Importantly when challenging an appointment it is useful to remember that a court has a supervisory role – just because a court might have nominated a different appointor – that by itself does not mean the exercise of a power can be over-turned.  The Royal Jersey court noted at [44] that  “A settlor does not choose the Court as the donee of the relevant power; he chooses the person appointed in or by virtue of the provisions in the trust deed.  It is the donee upon whom the power has been conferred.  The Court’s role is merely a supervisory one.  The Court may not therefore overturn the decision of a power holder merely because the Court would have reached a different decision.  However, it may do so where the decision falls outside the band of decisions within which reasonable disagreement is possible and becomes a decision which, in the Court’s opinion, is a decision which no reasonable holder of that power could arrive at.”

After considering the material before it in Representation of Jasmine Trustees Ltd the appointment of the New Zealand trustee company was held to be invalid as the:

  • material before the court did not show the trustee to be a suitable trustee
  • court was not satisfied that the decision was one that a reasonable appointor would make
  • appointor had failed to take relevant matters into account such as the trustee company’s expertise, experience and financial standing

A court cannot overturn a decision of a trustee that has not surrendered its discretion to the court, merely because the Court would have reached a different decision.  A court can only intervene where the decision is one which no reasonable trustee could arrive.

Regarding the suitability of the New Zealand trustee company (Kairos Trustees (NZ) Limited (Kairos)) the court referred to the due diligence carried out before the proceedings were filed, noting at [23] that:

“Finally on 10th March Kairos responded.  They apologised for the delay and explained this had been caused by the fact that two of their directors were travelling.  Jasmine and Lutea considered that the package of information provided by Kairos raised more questions than it answered.  After reviewing the material and carrying out Google searches, they ascertained that there were a number of gaps in respect of the information which had been sought (e.g. the CVs of the directors had not been provided).  Furthermore there were a number of features which gave rise for concern.  In particular it appeared that Kairos was incorporated in New Zealand in 2011, was wholly owned by another company which was in turn wholly owned by another company which was 100% owned by Mr Hanley personally.  It appeared that were three directors of Kairos namely Mr Hanley, an 80 year old resident of the Isle of Man and an Italian law professor resident and practising law in Milan.  Mr Jenner replied to Kairos on 20th March posing eleven specific questions on which he sought further clarification and information.  At the same time he e-mailed the father enclosing a copy of his e-mail to Kairos and asking the father to explain his rationale in choosing Kairos as successor trustee.  The father replied that he was referring the matter to his lawyer.”

The court in deciding that the appointment of Kairos was invalid summarised its reasons for this finding at [48] noting that:

“(i)        There was considerable delay in supplying the standard due diligence information requested of Kairos.  Mr Jenner stated in evidence that this was a routine request to a professional trustee and he would have expected there to have been a package of documents and information available for immediate provision on a regular basis.

(ii)       No information was provided at any stage about the financial position of Kairos or of its parent companies.  Nothing was provided to show that it had expertise and experience in the field of trust administration.

(iii)      It appeared ultimately to be 100% owned by an individual director.

(iv)      No information was provided as to its insurance cover, its capital base and other matters which might be thought relevant to whether it was suitable to act as a trustee of these two substantial Trusts.

(v)       Although in due course the names of the three directors were provided, no information about their careers, experience in trust administration etc was ever provided.  The three directors resided in New Zealand, Italy and the Isle of Man respectively and the Isle of Man director was aged 80.

(vi)      Kairos appeared to have no presence on the internet nor did it have an internet domain name and related email accounts.  Mr Hanley was shown on the website for a company called Pearse Trustees (which appeared from its website to be an international trust company) as the manager of that company which operated from the same address as Kairos; but Kairos was not mentioned at all on the website of Pearse Trustees.

(vii)     The beneficiaries of the two Trusts are resident in the United States and the United Kingdom.  Whilst the fact that a trustee is incorporated or carries on business in a jurisdiction where none of the beneficiaries live (as is the case for both the Cayman Islands and Jersey in relation to these Trusts), is not a reason to question the appointment of a trustee, the fact that New Zealand is on the other side of the globe and in a wholly different time-zone which would make communication between trustee and beneficiaries more difficult, is at least a factor to be considered by an appointor.

(viii)    Highly significantly, the father does not appear to have considered any of these matters prior to making the appointment.  Thus he was unable to assist when information was requested by Jasmine/Lutea and he said merely that he expected to be in touch with one of Kairos’ legal representatives in New York on 15th March.  But this was of course after he had appointed Kairos.

(ix)      The father has explained in his affidavits why he wished to replace Jasmine and Lutea.  However the sole reason that he has given for choosing Kairos as the replacement trustee is that he was advised in mid-2013 that it might be preferable to relocate the trust to a ‘white listed’ jurisdiction as considered from the perspective of ‘relevant authorities’ (Jersey, he said, not being such a white listed jurisdiction).  He was further advised that New Zealand was such a jurisdiction and that Kairos was a New Zealand trust company which had been identified and was happy to accept the role as trustee.  On enquiry by the Court, which understood that Jersey was indeed a white listed jurisdiction for OECD purposes, the Court was informed that the ‘relevant authority’ which the father had in mind was Italy.  As none of the beneficiaries resides in Italy, it was not made clear why that would be a material consideration.”

At [49] the Court then went onto state that “In summary, we conclude that the father [who had the power of appointment] failed to take into account material matters, namely the expertise, experience, financial standing etc. of the proposed trustee of two substantial trusts, took irrelevant matters into account (namely New Zealand’s position vis à vis Italy) and in the circumstances reached a decision which no reasonable appointor could have arrived at.  We therefore declare the appointment of Kairos to be invalid in relation to both Trusts.”

Given the attention being paid to New Zealand foreign trusts at present; while this case does not come before the courts for that reason; the conclusions are a useful reminder that any trustee that is appointed (regardless of who exercises the power of appointment) needs to be able demonstrate fitness for purpose.

Of note a separate costs decision is also noteworthy given the reality of costs as a significant litigation consideration.  Regarding the appointment of Kairos – the decision of court provides useful guidance on that subject.  The court noted that  the proceedings only became necessary because of the appointor’s appointment. This raised the question of whether he should be deprived of his indemnity (as protector) out of the Trusts and/or whether he should be ordered to pay the costs of any other parties.  The court was satisfied that he should not at [38] because:

“…  an unremunerated family trustee will not lightly be ordered to pay the costs of litigation if he has made an innocent mistake or acted in a manner which has ex post facto been shown to be misguided or even careless.  In my judgment, that is the situation here.  The father was misguided in the appointment of Kairos.  He failed to have regard to relevant factors and took into account irrelevant factors as described in the September judgment.  However there is no finding, for example, that he acted in bad faith or for any improper purpose or with reckless disregard for his fiduciary duties.  These are of course not to be taken as the only circumstances where a fiduciary may be deprived of his indemnity or ordered to pay the costs of another party but, in the circumstances I do not consider that the nature or gravity of his conduct has reached the level where it is appropriate to deprive him of his indemnity.  Nor do I consider that his conduct in connection with the actual litigation was unreasonable.  In the circumstances I agree that he should be indemnified out of the Trusts for his costs and should not be ordered to pay the costs of any other party.”

Whether the same conclusion would arise if the protector was a professional may require further consideration.

References:

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