Re Circle Trust

• Jurisdiction: Cayman Islands
• Judge: (Henderson, J.)
• Judgment Date: 28 July 2006
• Court: Grand Court (Cayman Islands)
• Date: 28 July 2006

Grand Court

(Henderson, J.)

IN THE MATTER OF THE CIRCLE TRUST

HSBC INTERNATIONAL TRUSTEE LIMITED

and

WONG and FIVE OTHERS

Ms. Z. Robertson for the plaintiff;

A. Fletcher and S.J. Barrie for the first, third and fourth defendants;

T. Lowe and Ms. C.J. Bridges-Giglioli for the second defendant;

G. Giglioli for the fifth defendant;

Ms. S. Warnock-Smith, Q.C. and M.D.P. Jones for the sixth defendant.

Cases cited:

(1) Burton, ReUNK(1994), 126 ALR 557, followed.

(2) Cardigan v. Curzon-HoweELR(1885), 30 Ch. D. 521, followed.

(3) Freiburg Trust, ReUNK, [2004] ITELR 1078; 2004 JLR N[13], followed.

(4) Inland Rev. Commrs. v. Schroder, [1983] STC 480; (1983), 57 T.C. 94, followed.

(5) Newen, In re, [1894] 2 Ch. 297, followed.

(6) Osiris Trustees Ltd., In re, 1999–01 MLR 206, followed.

(7) Papadimitriou, In re, 2001–03 MLR 287; [2004] WTLR 1141, followed.

(8) Rawcliffe v. Steele, 1993–95 MLR 426, considered.

(9) Rawson Trust Co. Ltd. v. Perlman(1990), Bahamas Supreme Ct., unreported, distinguished.

(10) Shortridge, In re, [1895] 1 Ch. 278, followed.

(11) Skeats” Settlement, In reELR(1889), 42 Ch. D. 522, applied.

(12) Von Knieriem v. Bermuda Trust Co. Ltd.(1994), Bermuda Supreme Ct., July 13th, 1994, unreported, considered.

(13) Webb v. Earl of Shaftesbury(1802), 7 Ves. 481; 32 E.R. 194, considered.

(14) Wills” Trust Deeds, Re, [1964] Ch. 219; [1963] 1 All E.R. 390, referred to.

(15) Z Trust, In re, 1997 CILR 248, applied.

Trusts-trust protector-appointment-power of beneficiaries to appoint protector usually fiduciary unless settlor”s intention that power personal-probably fiduciary if protector has power to appoint or remove trustees

Trusts-trust protector-removal-Grand Court has inherent jurisdiction to remove and replace protector if fails to exercise powers for benefit of beneficiaries as a whole-preferable to review appointment at early stage, e.g. on ground of irrationality, absence of good faith or impropriety of purpose, as ex post facto action may result in loss to trust through misbehaviour

The plaintiff (the trustee of the Circle Trust) applied to the court for the preliminary determination of seven questions.

The Circle Trust was created by a nominal settlor in December 2000, but all parties agreed that the real settlor was F, the sixth defendant, who was named as a member of the excluded class. The first defendant was F”s wife, and the second to fifth defendants his sons; all were named as beneficiaries of the trust. The second and fifth defendants claimed that F had withdrawn trust assets without authority and demanded information to which he was not entitled. In an effort to assert control over the dispute, the wife and other two sons appointed F as trust protector under a clause of the deed which gave the majority of sui juris beneficiaries the power to appoint an ‘additional protector.’ The fourth defendant then executed a deed (purporting to be revocable) disclaiming his beneficial interest in the trust, and the next day F attempted to remove the plaintiff as trustee and appoint the fourth defendant instead.

The second and fifth defendants asserted that the appointment of F as protector was invalid because it was tainted by irrationality, absence of good faith, and impropriety of motive, and that consequently his removal of the plaintiff and appointment of the fourth defendant as trustee were invalid. The court agreed to decide as a preliminary issue whether, under the terms of the trust deeds the majority of beneficiaries have the power to appoint a protector and, if so whether their exercise of that power would be invalid if tainted by irrationality, bad faith, or impropriety of purpose.

The second and fifth defendants submitted that (a) if the majority had the power to appoint a protector, then they should be obliged to exercise that power in good faith, as beneficiaries appointing a protector with the power to appoint trustees should be treated as exercising a fiduciary power; furthermore, it was clearly the intention of the settlor that the protector”s powers should be fiduciary, and therefore the powers of the beneficiaries appointing him ought also to be fiduciary; (b) the deed clearly indicated that the protector”s powers were fiduciary (including his extensive powers for the removal or appointment of trustees) but that was not sufficient protection for the minority beneficiaries, and should not prevent the court from also treating the majority”s power to appoint a protector as fiduciary and therefore reviewable, as if the protector were appointed in bad faith and did not take any action to protect the trust, the funds could well be significantly diminished before there was sufficient evidence of his abuse of power for the minority beneficiaries to seek a remedy; and (c) in any case the trust deed only conferred on the majority of beneficiaries a power to appoint an ‘additional protector’ and as no protector existed at the time of F”s appointment, he could not be sensibly considered ‘an additional protector’; and the majority did not have the power to appoint him.

The first, third, fourth and sixth defendants submitted in reply that (a) beneficiaries under a trust held personal powers which were exercisable for their own benefit without being subject to scrutiny unless they had the power to remove and appoint trustees, which the beneficiaries in this case did not have; (b) the protector”s powers to appoint trustees were clearly fiduciary and therefore there was no need to create an additional layer of protection by holding that the powers of the beneficiaries to appoint him were also fiduciary; and (c) it was illogical for the deed to outline a procedure for appointing an ‘additional’ protector, with ‘additional’ strictly construed, as no protector had been appointed at the date of execution, and so those clauses of the deed would be redundant; ‘additional’ should therefore be read as meaning ‘additional to the existing structure of the trust.’

Held, making a preliminary ruling:

(1) The majority of sui juris beneficiaries had the power to appoint a protector, but the power was fiduciary and they were therefore obliged to exercise it in good faith. If they had been given the power to appoint trustees, the power would normally have been fiduciary, and a power to appoint a protector who in turn could appoint trustees would not be treated differently here as, based on the construction of the trust deed, it could not be shown that the intentions of the settlor were otherwise (para. 23; para. 27).

(2) Furthermore, as the deed did not indicate clearly to the contrary, the protector himself held a fiduciary position and his power to appoint and remove trustees was subject to scrutiny by the court. He could exercise his powers only for the good of the beneficiaries as a whole and the court

had an inherent jurisdiction to remove him and appoint another in his place if he failed to do so. However, it was better that such scrutiny of his capabilities was available as early as possible by permitting a review of his appointment on the grounds of its irrationality, the absence of good faith or impropriety of purpose of the majority of the beneficiaries, rather than relying solely on an ex post facto review of his actions (paras. 24–26).

(3) Although a very literal reading of the trust deed might have given the impression that a protector could only be appointed in addition to one already named, as the deed clearly outlined the procedures for appointing a protector though ‘no protector has been appointed at the date of this deed,’ it was clearly the intention of the settlor that a protector could be appointed by the beneficiaries if they felt it necessary. The deed was therefore to be...