The BVI courts have tackled a number of trust disputes over the last couple of years, addressing a number of important issues, some of which have not been the subject of previous decisions. These issues include:
- Whether common form powers of appointment can be used to exclude beneficiaries.
- The extent of the trustee's duties on the delegation of investment management.
- Whether anti-Bartlett clauses are effective.
- The scope of indemnity and exoneration clauses.
- The interpretation of a trust deed with apparently contradictory beneficial provisions.
This update contains on overview of the following cases:
- The New Huerto Trust1
- Appleby Corporate Services (BVI) Limited v Citco Trustees (BVI) Limited2
- Equity Trustee Limited v Yang Hsueh Chi Serena & Others3
THE NEW HUERTO TRUST
Facts
This was an application by the Trustee for approval of a deed of appointment excluding the settlor as a beneficiary of the Trust. The deed also sought to release the Trustee's power of revocation and to give it unlimited power to vary the terms of the Trust in the future. The purpose of the exclusion was to prevent the trust assets being caught by a worldwide freezing order of the Family Division of the English High Court in divorce proceedings brought by the settlor's wife and presumably to prevent them being treated as a financial resource on the basis that he could no longer benefit from them.
The Trust was discretionary and the power of appointment was in the following terms:
"The Trustees stand possessed of the Trust Fund and the income thereof upon discretionary trusts for the benefit of the Beneficiaries or any one of more of them exclusive of the others in such shares and proportions and subject to such terms and limitations and with and subject to such provisions for maintenance, education or advancement or for accumulation of income during minority or for forfeiture in the event of bankruptcy or otherwise and such other conditions as the Trustees may from time [sic] appoint by Deed revocable or irrevocable executed before the Vesting Day".
There was no express power in the Trust Deed to add or remove anyone from the class of Beneficiaries, to vary or revoke any of the provisions of the Trust or to permit the Trustee to appoint the Trust Fund onto new discretionary trusts.
Decision
It was held that the Trustee could not exercise its power of appointment to vary the terms of the Trust Deed as it wished: in particular, the power could not be exercised so as to exclude a beneficiary from the class of Beneficiaries. It could only be exercised in favour of certain defined objects so as to create beneficial interests in one or more of those objects. The proposed appointment was not a permitted exercise of the Trustee's power, as it did not appoint any property to, or confer any benefit on, any person.
In reaching his decision, Bannister J noted that he was not following the decisions of the English Court of Appeal in either Blausten v Inland Revenue Commissioners4 or Muir v IRC5 despite the fact that Blausten has been widely relied upon by English practitioners to support the proposition that a common form power of appointment could be used to exclude objects from a discretionary class without any appointment of beneficial interests.
Comment
We do not think that trust advisers need be concerned for the following reasons.
First, it is not clear that the decision is inconsistent with Blausten. The scope of a power of appointment is a question of construction and any power must be construed on its own facts.
Secondly, the power in Blausten was in different (and wider) terms and, in particular, referred to appointments which could be made "...generally in such manner as the trustees shall think fit...", so it is possible that the power in the New Huerto Trust could have been distinguished, although admittedly, that was not the reason actually given by Bannister J.
Thirdly, a modern wide form of power should not create any difficulty.6
However, given the comments of Bannister J in this case, it will do no harm to include an express reference to the exclusion of beneficiaries for the avoidance of doubt. Similarly, for existing trusts, trustees might now be well advised to exercise more caution and make an application to court if there is any doubt as to the extent of the power.
APPLEBY CORPORATE SERVICES (BVI) LIMITED V CITCO TRUSTEES (BVI) LIMITED
This was an interesting case, which dealt with a number of issues close to the hearts of trustees everywhere: investment duties (and the effectiveness - or otherwise - of anti-Bartlett clauses) exoneration and indemnity provisions and indemnities on changes of trustees.
Facts
Citco Trustees (BVI) Limited ("Citco") was the sole trustee of a BVI law discretionary trust. The sole asset of the trust was the entire issued share capital of a BVI company ("Holdco") which in turn held a portfolio of financial investments. Citco had delegated the management of those investments to a professional investment manager (the "IM"), on the terms of a written investment management agreement (the "IMA"). The IM had disregarded the contractual investment guidelines and invested in speculative trading on margin, as a result of which almost the entire value of the trust fund was lost.7 The loss arose between June 2005 and December 2010, during which time, monthly portfolio statements (from which the breaches and the loss in value were immediately apparent) were sent to Holdco at Citco's office. The statements had been seen and considered by Citco personnel.
The trust deed incorporated the powers and immunities set out in the Second Schedule to the Trustee Act,8 including paragraphs 4(q)(i) (the power to delegate investment management) and 8 (excluding the trustee's duty to interfere with company management – often called an 'anti-Bartlett clause')9.
Much turned on the construction of clause 14(b) of the trust instrument, which provided that:
"The Trustee may resign as trustee hereof on providing 60 days' notice to the Protector (or, if there is no Protector, to the Settlor)...and the outgoing trustee...shall be indemnified in respect of any fiscal imposition or other liability of any nature payable in respect of the Trust Fund or otherwise in connection with this Trust except its own wilful fraud or wrongdoing."
At the settlor's request, Citco retired in favour of Appleby Corporate Services (BVI) Limited ("Appleby"). The form of indemnity agreed between them in the Deed of Appointment and Retirement (the "DORA") restricted Appleby's liability as new trustee to extend only to the liabilities in respect of which Citco "...would have been entitled to reimbursement out of the Trust Fund had they remained as trustees of the Trust on its present terms."
Following their appointment, Appleby brought proceedings against Citco alleging a breach of Citco's duties in relation to the management of the investments and seeking recovery of the loss in capital value of the trust assets and the income that would have been received had it been maintained.
There was a preliminary hearing10 in which Citco's application to the court to strike out the claims was dismissed.
Decision
(a) Was the IMA between Holdco and the IM a delegation under the trust deed?
Strictly, the assets placed under the management of the IM were not trust assets but assets of Holdco. Both parties viewed this as no more than a technical distinction and Bannister J agreed. This may have turned partly on the facts – Citco was a party to the IMA and explicitly reserved rights of overall supervision and control over the assets, making any distinction between assets held by the trustee and those held by Holdco artificial.
This issue was a potentially significant one, as it determined whether paragraph 4(q)(i) (and the exoneration contained in it) applied.
(b) 'Pre-pack' arrangements – do they affect the trustee's duties?
The second issue concerned what were referred to as "pre-pack arrangements", under which the trustee exchanges places with the shareholder of a corporate structure already under management, on the understanding that the trust property will continue to be managed by the same persons as before.
This arrangement is common in practice: the intention to appoint a particular investment manager is sometimes referred to in the trust deed itself or in a letter of wishes from the settlor.
Unsurprisingly, Bannister J confirmed that:
"I do not think that the route by means of which a trust comes to be established of itself affects the underlying duties of its trustee."
(c) The Trustee's Investment Duties
It was held that, where investment management has been validly delegated, the trustee is under a duty to have in place appropriate risk management procedures in order to be able to satisfy itself that such delegated powers and functions are adhered to and not abused. The duty is not only to respond to information giving cause for concern about the management, but also to inform itself at appropriate intervals on the state of the company's portfolio and the manner in which is being managed.
The trustee should therefore have taken "reasonable steps to satisfy itself at appropriate intervals that the investment guidelines were being observed and that the overall value of the fund had not been affected by any abuse on the part of [the IM] of its delegated authority".
(d) Does the anti-Bartlett clause help the trustee?
We have always (in common with many other commentators and advisers) counselled caution in relying on these types of clauses. It is thought that they give trustees little or no protection and are unlikely to absolve the trustee from the duty to take care when choosing directors or supervising the activities of the company.11 But until now, there has, as far as we are aware, been no actual authority directly on this point.
Bannister J said:
"I do not think that this provision [i.e. paragraph 8 of the Second Schedule to the Trustee Act] is engaged. "... [It] did not relieve it of the duty to satisfy itself from time to time that nothing untoward was affecting the value of the shares."
(e) Was the trustee able to rely on the statutory exoneration provisions?
The trustee sought to rely on section 31(1) of the Trustee Act which provides that the trustee is:
"...accountable only for his own acts...and not those for any other...person...unless the same happens through his own wilful default".
It was held, following the English authority,12 that this applies only to vicarious liability (i.e. liability for the default of another),
The trustee also sought to rely on paragraph 4(q) of the Second Schedule, which provides that the trustee:
"...shall not be liable for any action taken in good faith pursuant to or otherwise in accordance with the advice of the Investment Advisor".
This did not assist the trustee for the same reason – i.e. it only excluded vicarious liability; it did not relieve the trustee from any liability from its own negligent breach of duty.
(f) Was the trustee able to rely on the express exoneration and indemnity clauses?
This brings us to the provisions which were central to the case: the express exoneration and indemnity clauses.
The first issue was whether clause 14(b) was engaged at all. Appleby argued that the indemnity contained in the DORA superseded the indemnity in clause 14(b). On the facts, it was held that it did not, although Bannister J had said that there was a "persuasive argument" for that view.
The second issue concerned the construction of the indemnity clause. The indemnity for retiring trustees in clause 14(b) was contrasted with an exoneration given to the protector in a separate clause (clause 16) which provided:
"The Protector (if any) shall not be liable for any loss to the Trust Fund arising in consequence of...any other matter or thing except wilful fraud or wrongdoing..."
In an interlocutory hearing, Bannister J thought that "clause 16 plainly and unambiguously excludes liability for non-wilful breaches of trust". That seems correct: it follows a clear line of English case authority that the word "wilful" is intended to qualify "wrongdoing" as well as "fraud".13 He went on to note that if the intention had been to provide similar protection to the trustee, why was similar wording not used?
However, it was held at trial that neither of the indemnities (i.e. clause 14(b) of the trust deed and clause 3 of the DORA) excluded liability for a negligent breach of trust.
It appears that the decision was based on the fact that Clause 14(b) was couched in terms of an indemnity for liabilities, not an exoneration preventing liability to beneficiaries arising in the first place. On that basis, it was held that clause 14(b) only covered third party liabilities, not liabilities to beneficiaries for breach of trust, notwithstanding the apparently wide words used:
"...any fiscal imposition or other liability of any nature payable in respect of the Trust Fund or otherwise in connection with the Trust...".
Citco's argument based on circuity – i.e. that even if they were liable for a negligent breach of trust, they were entitled to an indemnity in respect of that liability from the Trust Fund (under clause 14(b)) and from Appleby (under clause 3 of the DORA) was therefore rejected.
Comment
The judge's comments about the trustee's investment duties are unsurprising. They confirm that a trustee has a duty to be proactive, even where the investment management has been delegated to a professional manager and the way in which the trust was established does not affect those duties. We now also have confirmation that an anti-Bartlett clause is unlikely to protect a trustee which is in breach of those duties.
If the intention when the trust is established is that those duties should be modified or excluded, consideration should be given as to whether a VISTA trust might better suit the settlor's and trustee's intentions.14
There are some lessons to be learned from the decision about the drafting of trust deeds and deeds on changes of trustees.
First, the trust deed should include both exoneration and indemnity provisions. A well-advised trustee has always ensured that there are both exoneration provisions (which provide that a trustee has no liability to any beneficiary for any loss to the trust fund caused by a breach of trust save in the event of, say, wilful default) and indemnity provisions (which provide that the trustee is entitled to be indemnified from the trust fund for liabilities incurred save to the same extent). As can be been seen from this case, an indemnity alone creates a risk. It needs to be borne in mind that an exoneration clause alone also creates a risk: it is still an open question (in the absence of clear wording) as to whether a wide exoneration provision also confers a right of indemnity in respect of third party liabilities on a trustee.15
Secondly, any exoneration and indemnity provisions should apply to all the trustee's duties so that different standards are not applied to different duties (unless, of course, that is the intention). By way of example, it is not unusual to see provisions in a delegation clause providing that the trustee is not liable:
"...providing that [s]he took reasonable care in the selection and supervision of the delegate..."
This is no doubt intended to exclude vicarious liability on the part of the trustee for the acts or defaults of delegates, but where there is a wider general exoneration provision (e.g. excluding the trustee's liability except in the case of actual fraud or wilful default), the effect is to impose liability on the trustee for its negligence (i.e. failure to take reasonable care) in relation to the delegation,16 so a provision which was originally intended to protect the trustee, has the opposite effect!
A third point which trustees and their advisers need to watch out for is in relation to the negotiation of indemnities on retirement. It is not uncommon for there to be express provisions in the trust instrument in relation to exoneration or indemnity on the retirement of the trustee. If they wish to ensure that they can rely on those provisions, it would be prudent to ensure that that is made express in the deed of appointment and retirement.
EQUITY TRUSTEE LIMITED V YANG HSUEH CHI SERENA & OTHERS
Facts
This case concerned the interpretation of a trust deed establishing the Huge Surplus Trust. The precedent which had been used was discretionary in form but, instead of a list of persons comprising the class of beneficiaries (who were called the Specified Beneficiaries), it named (in Annexure Item 26) six individuals with a "percentage of entitlement" specified next to each of their names. It went on to say that the Specified Beneficiaries included:
"... any person declared in an instrument pursuant to clause Q1 of this Deed to be a Specified Beneficiary ... provided that any person who has been excluded from being a Specified Beneficiary pursuant to the provisions of clause Q4 of this Deed shall not be a Specified Beneficiary from the date of such exclusion..."
The settlor also signed a letter of wishes containing the same list of individuals and percentages, stating that "It is my wish that, in the event of my death.." those individuals "...should receive a distribution of the whole of the assets as soon as practicable in the above-mentioned percentages" but without the above paragraph concerning the exclusion of beneficiaries.
The letter of wishes went on to say that:
"It is my further wish that, in the event that either one of the above-named beneficiaries has not survived me or dies before distribution has been completed, the amount so rendered available for distribution to the deceased should be distributed among the survivors of the above-named beneficiaries pro-rata to their respective entitlements.
It is my further wish that, in the event that all the above-named beneficiaries have not survived me or died before distribution has been completed, the amount so rendered available for distribution should be accumulated or distributed to the following persons in the undernoted percentages:
[Left blank]."
The trust assets comprised 50% of a Hong Kong company, Shun Hing Holdings Co Ltd, which was the Hong Kong holding company of a trading group, the Shun Hing Group. Each of the six named beneficiaries held the same percentage of shares in the ultimate holding company of the Shun Hing Group as was set out next to their name in the trust deed.
The first defendant was the settlor's ex-wife and the settlor had requested that she be removed as a Specified Beneficiary and that the percentage entitlement be altered. The trustee executed a deed effecting those changes.
Decision
Counsel to the first to sixth defendants argued that the provisions in Annexure Item 26 granted each of the named beneficiaries an immediate fixed and indivisible interest in the entirety of the trust fund in those proportions. It was argued that those entitlements were intended to compensate them for the loss of value suffered when the Huge Surplus Trust was given 50% of the trading group. The argument was that the words of entitlement must take precedence over any provision of the trust deed which is inconsistent with them on the basis of the well-established principle in cases of commercial contract that the court will, in case of conflict, tend to prefer or give more weight to superadded terms or definitions than to the printed terms or definitions contained in a particular standard form contract.
That argument was rejected on the basis that the settlement was not a standard commercial form in common use between merchants but also because the result of making interpolations into a precedent was not to produce a completed standard form but the execution draft of a settlement. On the construction of the document as a whole, it was held that it was fully discretionary and that the stated percentages did not create any immediate entitlements.
Comment
The case serves as another reminder of the importance of velar legal drafting. It also reminds us of the even more extreme example where the drafting was so confused that the court17 held the trust void for uncertainty, as they were unable, even with help of extrinsic evidence, to ascertain its meaning.
Drafting does matter and is fraught with danger - it should be left to the experts!
Footnotes
1. (BVIHC 112/2013, 8 November 2013)
2. (BVIHC 156/2011, 20 January 2014)
3. (BVI HC 0072 of 2011, 9 June 2013)
4. [1972] Ch.256
5. [1966] 1 WLR 1269
6. See, for example, Kessler, Pursall & Chand, Drafting British Virgin Islands Trusts (1st Edition, 2014) at para.10.2.
7. This is a simplification of the facts, but was in effect the finding of fact by the court, so is sufficient for present purposes.
8. Pursuant to s.93 of the Trustee Act 1961 (as amended) (the "Trustee Act").
9. After the case of Bartlett v Barclays Bank Trust Co Ltd. [1980] 1 Ch 515.
10. On 17 May 2012.
11. See Kessler, Pursall & Chand, Drafting British Virgin Islands Trusts (1st Edition, 2014) at para 5.28.
12. Re Vickery [1931] 1 Ch. 572.
13. Alexander-Forbes Trustee Services Ltd v Halliwell [2003] OPLR 355; Bonham v Fishwick [2007] EWHC 1859; and confirmed only last year in Barnsley and others v Noble [2014] EWHC 2657.
14. Virgin Islands Special Trusts Act, 2003 (as amended). For more information, see Drafting Virgin Islands Trusts, Chapter 17 (VISTA Trusts).
15. Lewin on Trusts (19th ed, 2015) at paras 21-008, 39-147.
16. See Kessler, Pursall & Chand, Drafting British Virgin Islands Trusts (1st Edition, 2014) at para 18.46.
17. The Jersey Royal Court: Re Double Happiness Trust [2003] WTLR 367.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
