Momentous decisions: seeking the court’s blessing

Post-Cardigan analysis by 5 Stone Buildings’ Hugh Cumber

The recent decision of the English Court of Appeal in the Cardigan litigation illustrates the importance of applications by the trustees for the approval of ‘momentous’ decisions, as set out in the case of Public Trustee v Cooper [2001].

Such applications are widely used in offshore jurisdictions and have a number of advantages for trustees, who may prospectively insure that their decisions are insulated from challenge by dissatisfied beneficiaries. However, if this exercise is to be successful, the trustees will be required to give full evidence of their reasons.

In many circumstances, trustees will wish to seek the court’s approval for a decision they have already made in principle; this is distinct from the trustees surrendering their discretion to the court. Some decisions are very likely to prove unpopular with one or more beneficiary. This is particularly the case with so-called ‘momentous’ decisions; the classic illustration of such a decision would be a decision by the trustees to sell a family estate or to sell a controlling interest in a family company. On such an application, the court will ask itself where the decision has in fact been made, whether it is one that a reasonable trustee or body of trustees properly instructed could have reached and whether the decision has been vitiated by any actual or potential conflict of interest. The court’s aim is to see whether the action is one that a reasonable body of trustees could take; the court will not therefore withhold approval merely because the court would not itself choose to exercise the power in the way the trustees propose.

Such an application could be viewed as prophylactic; the consequence of such an approval is to deprive beneficiaries of the ability to argue that the decision was a breach of trust. For this reason, the court will act cautiously; as Sir Andrew Morritt put it in Tamlin v Edgar [2011], the court it is not a ‘rubber stamp’. The trustees must therefore put the court in possession of all the relevant facts. The Cardigan case [2014] is of interest because the trustees relied upon expert evidence to form their view; the Court of Appeal held that the trustees were not obliged to second guess the expert advice they received.

Owing to the attractive features of such applications for trustees, the procedure is widely used in offshore jurisdictions. In Jersey, for example, the English approach represented by Public Trustee v Cooper was expressly adopted by Re S Settlement [2001] and numerous instances of such applications may be found in reported judgments of the Jersey courts; the procedure is under article 51 of the Trusts (Jersey) Law 1984. A typical example would be In Re The Repus Trust [2005], which concerned the sale of property that had been the family home for 300 years. Similarly, in MM v SG Hambros [2010], the court approved the sale of a property against the wishes of the settlor and the remainderman. Such applications are clearly prudent where a decision is likely to be strongly resisted by one or more beneficiaries.

The recent Jersey case of In Re Q Trust [2014] provides a vivid example of such a case; there was considerable contention between two classes of beneficiaries, the children of the settlor’s first and second wife respectively. The trustee reached the view that the assets of the Q Trust needed to be distributed and the question arose as to whether one class of beneficiaries should be excluded. Following an abortive consultation process, the trustee made an ‘in principle’ decision to distribute the assets between both classes of beneficiaries. Among the trustees’ motivations was a desire to avoid unproductive and lengthy litigation between the beneficiaries. Complicating matters further, the trustee itself was due unpaid fees, leading to a potential conflict of interest. Despite these difficulties, the court sanctioned the trustees’ ‘in principle’ decision.

A practical concern that has arisen in recent cases is the need for detailed evidence from the trustees about their decision-making process. The importance of this requirement was reiterated by the recent Jersey Court of Appeal case of Rep of Otto Poon Trust [2015]. The court in that case explained that the amount of evidence required will vary according to the circumstances of the decision; more detail and explanation may be required for an ‘out of the blue’ decision. The courts have repeatedly stated the need for the trustees to demonstrate relevant considerations supported by evidence (see for example Thommessen v Butterfield Trust (Guernsey) Ltd & anor [2009-10]). An obvious contrast may be drawn between Cardigan and the 2014 Guernsey case of In Re [AAA] Children’s Trust [2014]. In that case, the trustees failed properly to provide such information and the court described this failure as ‘unforgivable’. The court expressed its surprise that the professional trust administrators in the case did not prepare a dossier of relevant information for consideration by the trustees or convene a meeting for the purpose of considering the momentous decision. As such, it was impossible to discern what the trustees had in their minds at the relevant time.

It is clear that Public Trustee v Cooper is a powerful tool for trustees; however a case like [AAA] Children’s Trust is something of a cautionary tale, illustrating both the importance that such a decision is approached correctly by the trustees, and that appropriately full evidence is used in support of such an application. Moreover, Cardigan illustrates the potential importance of suitable expert advice in such an application.