Offshore Trust and Estate Litigation Update Series – Part I
Trust and estate disputes in both the Cayman Islands and the BVI, and claims against the actions of a trustee/executor or disputes related to an interested party’s entitlement under a deceased’s estate, continue to be on the rise.
This series analyses recent cases concerning trust and estate disputes in the Cayman Islands and the BVI which demonstrate the scope of the Courts’ supervisory role and powers. These decisions provide clarity as to the approach to be taken by the Courts in similar cases in other offshore and common law jurisdictions, and serve as a useful reminder of the fact that the Courts will not substitute their own views for those of trustees or beneficiaries, and will generally give priority to the specific facts of each case.
The first article in this series discusses a 2022 Cayman Islands case where the Cayman Court considered an application for “blessing” of a “momentous decision” in the context of a trustee’s decision, and was for the first time being invited to balance the trustee’s entitlement to remuneration against the rights of beneficiaries and potential third-party proprietary claimants.
In the Matter of The X Trust and The Y Trust – FSD 57 of 2022 (IKJ)
In this case, the trustee (the “Trustee”) sought an order that, amongst other things, it be permitted to liquidate assets in order to pay its unpaid and future fees and expenses. The Trustee was appointed in respect of two trusts (the X Trust and the Y Trust) governed by Cayman Islands law (the “Trusts”). The defendant, a child of the settlor, was appointed to represent all of the beneficiaries of both Trusts.
There was no dispute about the Trustee’s entitlement to take such steps as might reasonably be required to meet its outstanding fees and expenses and those which would soon fall due. The argument centred on whether or not liquidating two of the most liquid assets at a substantial discount was the best available commercial decision.
The central rationale for liquidating assets at a substantial discount to their face value was that no alternative ways to meet trust expenses could be found and that, although the beneficiaries had been afforded a reasonable time to formulate substantive alternative proposals, no concrete proposals had been made. The pivotal question arising was whether or not the Trustee had, as it contended, exhausted all reasonable attempts to consider the defendants’ alternative proposal.
This question arose in circumstances where:
- the looming spectre of the Trustee being removed appeared to create a risk that the stability of the Trusts might be undermined contrary to the best interests of the beneficiaries;
- the defendant had belatedly raised a tangible alternative proposal which would potentially be more commercially favourable to the Trusts and beneficial to whomever was interested in the Trust assets;
- it was self-evident that taking out a loan to pay and/or secure Trust administration expenses only made commercial sense (as an alternative to the Trustee’s proposed asset sales) if alternative assets could be sold far closer to market value over the course of any loan term in order to repay the loan;
- there was an obvious conflict of interest between the Trustee’s legitimate interest in having its outstanding fees and expenses promptly paid and its immediate future fees and expenses promptly secured on the one hand, and carrying out an exploration of the viability of the defendant’s alternative options on the other;
- the Trustee’s clear and concise proposal necessarily involved liquidating assets for significantly less than their face value; and
- the existence of potential third-party claimants not before the Court necessitated a precautionary approach and broader analysis of the Trustee’s contention.
The Court’s Jurisdiction
Pursuant to section 48 of the Trusts Act (2021 Revision), any trustee shall be at liberty to apply to the Court for an opinion, advice or direction on any question respecting the management or administration of trust money or assets of any testator or intestate. As regards how this jurisdiction should be exercised, in a Category 2 Public Trustee v Cooper application, Court sanction is required for what is considered to be a “particularly momentous” decision by a trustee. The issues for the Court to consider in such circumstances will normally be as follows:
- Does the trustee have power to enter into the proposed transactions?
- 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?
- Is the Court satisfied that this is a view that a reasonable trustee could properly have arrived at?
- 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?
While the Cayman Court has considered applications for “blessings” of many “momentous decisions” in the trust context, none appear to have concerned the consideration of balancing the right of a trustee to remuneration with the rights of both beneficiaries and potential third-party proprietary claimants not participating in the application.
The Findings and Key Takeaways
The Cayman Court held that the Trustee’s application was entirely rational. The Trustee’s fees and expenses had been unpaid for some time, there were no cash assets available out of which to indemnify themselves, and the beneficiaries had failed to formulate any concrete alternatives to the Trustee’s proposed realisation of the most liquid Trust assets.
However, having said that, applying a somewhat modified rationality test to the circumstances, the Cayman Court concluded that a reasonable trustee would wish to afford the defendant a further short opportunity to formulate a viable loan offer on terms which would raise funds to pay the Trustee’s fees and expenses and to enable a sale of alternative assets to be carried out on terms that may result in less diminution to the value of the Trust, and to also pursue negotiations to achieve consensus as to the best way forward in what may be considered to be difficult times. The Cayman Court held that it was just and convenient to grant an order affording a period of time to finalise a loan, and that only the lower valued Trust asset that the Trustee proposed should be liquidated in order to meet the Trustee’s expenses.
As regards whether it was permissible for a trustee to make payments out of a fund having notice of potentially valid third-party claims to it, the Cayman Court relied on several former judgments justifying the modification of the traditional Category 2 Public Trustee v Cooper approach. Pertinently, the Cayman Court noted that “the court has jurisdiction to permit or direct a trustee to distribute notwithstanding the existence of claims or potential claims from third parties”, and also cited the well-established principle stated by Deputy Judge Edward Nugee in Berkeley Applegate that “…the court has a discretion to require as a condition of giving effect to (the) equitable interest that an allowance be made for costs incurred and for skill and labour expanded in connection with the administration of the property.” Accordingly, the Cayman Court ordered, inter alia, that:
- 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 and the Y Trust”; and
- 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”.
The judgment provides a useful summary of the relevant law and helpful guidance as to how to approach Category 2 Public Trustee v Cooper applications, and sheds light on the likely attitude of the Cayman Court when dealing with “momentous” decisions. In particular, the decision shows that Category 2 Public Trustee v Cooper applications are fact-sensitive, and the Cayman Court in this case was careful not to prescribe a rigid set of requirements that would allow a trustee to ascribe the label “momentous” to a decision.