Proceedings Under Section 48 of the Trusts Act (2021 Revision) and the X Trust and The Y Trust Between: A Ltd (in its capacity as trustee of the X Trust and the Y Trust) Plaintiff v B Defendant

• Jurisdiction: Cayman Islands
• Judge: Justice Kawaley
• Judgment Date: 29 November 2022
• Court: Grand Court (Cayman Islands)
• Docket Number: CAUSE NO: FSD 57 of 2022 (IKJ)

In the Matter of Proceedings Under Section 48 of the Trusts Act (2021 Revision)

and

In the Matter of the X Trust and The Y Trust

Between:

A Limited (in its capacity as trustee of the X Trust and the Y Trust)

Plaintiff

and

B

Defendant

Before:

The Hon. Justice Kawaley

CAUSE NO: FSD 57 of 2022 (IKJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

INDEX

Trusts—administration of trusts having regard to the possibility of third-party proprietary claims against trust assets-implications of proceeding without notice to potential claimant-payment of trustee's fees and expenses-potential conflict of interest-liquidation of trust assets-rationality of proposed transaction-rationality of declining to further consider late modification to original proposal suggested by beneficiaries — section 48 Trusts Act (2021 Revision)

Appearances:

Mrs. Elspeth Talbot Rice KC instructed by Ms. Jessica Williams, Mr. Charles Moore and Ms. Moesha Ramsay-Howell of Harneys for the Plaintiff (the “Trustee”)

Ms. Shân Warnock-Smith KC instructed by Mr. Andrew Peedom and Ms. Sally Peedom of Collas Crill for the Defendant

IN CAMERA

Introduction and summary

1 By an Originating Summons dated 1 June 2022, the Trustee sought an Order that:

“ 1. It be permitted to retain its fees and expenses previously paid; to pay its incurred but unpaid expenses; and to pay its future fees, including its annual fixed fees and any special fees as defined in the evidence in support of this Originating Summons, and expenses, including its reasonable legal expenses, incurred or to be incurred in its capacity as trustee of the X Trust and the Y Trust.

2. It be permitted to [liquidate the two assets] referred to in the Trustee's evidence in support of this Originating Summons by way of realisation of Trust assets, inter alia to pay the said unpaid fees and expenses and the future fees and expenses.

3. The Trustee be indemnified out of the assets of the X Trust and the Y Trust in respect of its costs of the Originating Summons.”

2 The Trustee is the trustee of two trusts settled by the Settlor and governed by Cayman Islands law. The Defendant, a child of the Settlor, was appointed to represent all beneficiaries of both Trusts pursuant to GCR O. 15 r.13. The Defendant agreed in principle that the Trustee was entitled to be remunerated out of the assets of the Trusts but objected to the proposed liquidation of two specific assets held by the X Trust on the grounds that:

(a) the difference between the ultimate realizable of the assets it was proposed to liquidate and the current value was too great a loss for the Trusts to justifiably suffer in the circumstances without pursuing other more commercially favourable alternatives (principally a short-term loan secured by the Trust assets it was proposed to liquidate and a sale of other more illiquid assets held by the Y Trust); and

(b) the funds liquidating two assets immediately would generate far in excess of the Trustee's current or foreseeable fees, particularly since the beneficiaries were contemplating removing and replacing the Trustee.

3 The Trustee's response to these points was essentially that a loan was merely a short-term solution carrying borrowing costs which would be lost if no other assets were liquidated and the said assets would have to be surrendered in any event to repay the loan. The beneficiaries had not over several months demonstrated any serious intention of selling the alternate assets. It was further argued that the proposed alternative asset sale was a commercially uncertain option which lay primarily within the remit of the beneficiaries to actualize. As the Trustee's evidence made plain, it was not in fact intended to liquidate both assets immediately in any event. Leave was sought at this stage in respect of both assets to avoid the need for a subsequent application in the future; only the lower value asset would be liquidated immediately.

4 On balance, I considered it was desirable to allow the parties a short period of further time to at least seek to agree on the best way forward with a view to both preserving the value of the Trusts' assets and preserving the stability of the administration of the Trusts at a time when (with third party proprietary claims looming and an eminently reputable Trustee at the helm) a precautionary approach favouring stability was in my judgment clearly required. The Defendant's counsel invited the Court to adjourn the Trustee's application generally to allow the terms of a potential loan to be worked out, in light of the admitted lateness of the hour when the only tangible alternate proposal was communicated to the Trustee. The Trustee's counsel opposed this course, but submitted that if the Court was minded to adjourn in order to afford the Defendant a chance to perfect the loan proposal, it should sought do so on very strict terms.

5 The unusual interposition of the shadowy spectre of a potential third-party proprietary claimant into the traditional trustee/beneficiary matrix in my judgment justified the Court modifying, to a marginal extent, the traditional Public Trustee v Cooper category 2 approach. Rather than simply analysing the rationality of the transaction proposed by the Trustee when the application was made, I focussed on the rationality of the somewhat ad hoc decision not to further consider an alternate proposal (only advanced in tangible terms on the eve of the hearing) and also taking into account the Trustee's potential conflict of interest. Accordingly, on 7 November 2022 I ordered, inter alia, that:

• (a) the Trustee was entitled to retain its paid fees and expenses and pay its fees and expenses both unpaid and imminently due from “ the assets of the Trusts… on the footing that there are no third-party proprietary claims to any of the assets of the X Trust or the Y Trust”;

• (b) the “ Plaintiff and the Defendant be indemnified out of the assets of the X Trust and the Y Trust in respect of their costs of and occasioned by this claim on the footing that there are no third party proprietary claims to any of the assets of the X Trust or the Y Trust.

6 These are the reasons for that decision.

Governing legal principles

7 I was assisted by counsel's clear and cogent summary of the governing legal principles which informed the broad approach to be taken to the present application, set out in their respective Skeleton Arguments.

The Court's jurisdiction

8 There was no legal controversy in this regard, so it suffices for present purposes to set out here what I regarded as the most pertinent legal statements of principle, giving more attention to those issues which do not appear to have been previously addressed by this Court than matters which are now trite law.

9 Firstly, what jurisdiction was the Court exercising? The Trusts Act (2021 Revision) furnishes a straightforward statutory answer to that question:

“ Application to the Court for advice and directions

48. Any trustee or personal representative shall be at liberty, without the institution of suit, to apply to the Court for an opinion, advice or direction on any question respecting the management or administration of the trust money or the assets of any testator or intestate, such application to be served upon, or the hearing thereof to be attended by, all persons interested in such application, or such of them as the Court shall think expedient; and the trustee or personal representative acting upon the opinion, advice or direction given by the Court shall be deemed, so far as regards the person's own responsibility, to have discharged that person's duty as such trustee or personal representative in the subject matter of the said application:

Provided, that this shall not indemnify any trustee or personal representative in respect of any act done in accordance with such opinion, advice or direction as aforesaid, if such trustee or personal representative shall have been found to have committed any fraud, wilful concealment or misrepresentation in obtaining such opinion, advice or direction, and the costs of such application as aforesaid shall be in the discretion of the Court.”

10 As regards how this jurisdiction should be exercised based on relevant case law, the Defendant's counsel submitted most pertinently as follows:

“ 26. The Defendant accepts that this is an application which falls within what is described as a ‘category 2’ Public Trustee v Cooper 1 application with which the Court is very familiar. As the Grand Court has held previously on many occasions, where Court sanction is required for what is considered to be a ‘particularly momentous’ decision, the questions for the Court will normally be as follows:

(i) Does the trustee have power to enter into the proposed transactions?

(ii) Is the Court satisfied that the trustee has genuinely formed the view that the proposed transactions are in the best interests of the trust and its beneficiaries?

(iii) Is the Court satisfied that this is a view that [a] reasonable trustee could properly have arrived at?

(iv) Has the trustee any conflict of interest, and if so, does the Court consider that the conflict prevents it from approving the trustee's decision?

( see AA v BB and Colin Shaw (as Amicus Curiae) 2)

27. The Defendant respectfully submits that criterion (i) is satisfied. The Trustee has correctly acknowledged that the proceedings have been commenced as a result of the potential conflict of interest. Consequently, the remaining criteria which require the Court's consideration in particular are criteria (ii) and (iii) identified at paragraph 26 above.

28. In AA v BB, the Grand Court held that in considering criterion (iii) above, the Court's function is to apply the ‘rationality standard’, and cited with approval the description afforded to that standard in Lewin on Trusts 3, as follows:

‘The court's function where...