By means of a category two Public Trustee v Cooper application, in which Jeffrey Elkinson and Britt Smith of Conyers, led by Brian Green KC, acted for the successful plaintiffs, the first plaintiff as trustee, and the second plaintiff as protector, of three family trusts1 sought to give effect to a 2018 settlement agreement reached between all of the adult beneficiaries concerning the collective assets in the trusts. Following the settlor’s death in 2014, a protracted and bitter dispute arose between the adult beneficiaries of the family trusts, which was settled four years later.

The signatories to the settlement agreement were the settlor’s son, PDP, and PDP’s daughter and son; the settlor’s other son, JP, and his two sons; and the settlor’s daughter, JE, and her two sons and daughter. The settlement agreement recorded that the signatories had reached an agreement between themselves as to how they would wish the assets in the trusts to be disposed of and then distributed for the benefit of the three families and how the assets should be managed in the meantime.

The settlement agreement also recorded that its terms would form the basis on which the trustee would be invited to exercise its power to procure the distribution of the assets. The settlement agreement proposed that the transactions described in it would be implemented in accordance with a detailed timetable to be agreed by the trustee and approved by court order.

It was also recorded that in any court proceedings brought to secure court approval the signatories would support the proceedings and that to the extent that implementation of the proposal contained in the settlement agreement required further documentation the signatories would negotiate in good faith to secure the necessary agreement.

Part of the collective assets in the trusts concerned shares in the settlor’s company (“II”). Some 17.6% of the shares in II were held by a company called KIL, and KIL was owned three-sevenths by the JP Settlement and four-sevenths by the JE Settlement. It was believed that JP, in his own right, additionally owned 11% of the issued share capital in II and that the remaining issued share capital was owned or controlled by PDP.

Subject to excluded transactions, the practical effect of the settlement agreement was to cause the net assets of the trusts to be divided equally three ways. One of the excluded transactions concerned the KIL II shares. The KIL II shares were to be bought back by II at $54.34 and cancelled, with the proceeds of the buy-back being split between the JE Settlement and the JP Settlement to the exclusion of the PDP Settlement. The reason for the exclusion of the PDP Settlement from the proceeds of the buy-back was that the consideration paid by II was set on the basis that a notional one third of the KIL II shares that might otherwise have been allocated to the PDP family branch were acquired for nil consideration by that branch.

Following the signing of settlement agreement, as envisaged the KIL II shares were bought by II at the negotiated price. There was thereafter in late 2018 an onward sale by II at a higher price to the benefit of the PDP branch of the family. By Originating Summons dated 22 November 2018 the trustee sought Court approval of the decision to implement the settlement agreement.

In early 2020, both JE and JP provided sworn affidavit evidence that they supported the trustee’s application. However, following a Court direction that any defendant who asserted that the settlement was invalid should inform the Court, in August 2022 JE and JP, by letter from their attorneys,2 alleged that the settlement agreement was voidable as they had been induced to enter into it by the false representation that no onward sale of the II shares was contemplated.

There followed a hearing before the Chief Justice in early September 2022.3 At the hearing, those now asserting that the settlement agreement was invalid appeared and opposed the trustee’s application.

The letter from JE and JP’s attorneys additionally proposed that although the settlement agreement was liable to be set aside, neither JE nor JP intended to seek rescission and that the Court did not need to decide the question. It was said that the proper course for the Court was to entirely discount JE and JP’s views as recorded in the settlement agreement. It was also proposed that, to the extent the Court needed to address the misrepresentation allegation, the parties to the settlement agreement as well as the trustee and protector could file evidence.

The spouses of the adult beneficiaries who had signed the settlement agreement and were now opposing the trustee’s application were separately represented.4 They asserted that the process leading to the execution of the settlement agreement was tainted by a conflict of interest, that the arrangement contemplated by the settlement agreement was contrary to the settlor’s letter of wishes and that the PDP branch had negotiated the settlement in bad faith and had failed to disclose that the II shares were going to be sold to a third party purchaser. On this basis it was said that that the trustee should ignore the settlement agreement entirely.

In the Court’s view, the legal validity of the settlement agreement was a relevant issue to the question of whether it should approve the implementation of its terms. The trustee’s decision to make the application was premised on the assumption that the settlement agreement was binding and that it was in the interests of the adult beneficiaries that the Court should approve it. The Court, however, considered that it could not properly deal with the issue of whether the settlement agreement was voidable. Contrary to the views expressed by the opposing beneficiaries, the Court did not view the legal validity of the settlement agreement as being merely of peripheral relevance.

The Court considered that the allegations made regarding the voidability of the settlement agreement were fact sensitive and serious, including as they did allegations of deliberate wrongdoing and bad faith. Exercising its case management powers and discretion, the Court decided that the voidability allegations could not properly be dealt with in the trust proceedings. If any claim for rescission were to be pursued, it ought to be by a separate writ action which would allow for the allegations to be fully pleaded, discovery to be given and evidence filed.

This approach was consistent with the approach of the Jersey Royal Court in BNP Paribas Trust Corporation and PW Trust [2010] JRC 199. The Royal Court indicated that it was quite wrong for a valid Jersey trust to be hamstrung in the performance of its duties by unsubstantiated allegations which had not been taken forward to hostile litigation; the party making the allegations was required to have his claim adjudicated in separate proceedings, failing which he would not be permitted to make the claim without special leave.

The Chief Justice thereby adjourned the Public Trustee v Cooper application, directing that any rescission claim would need to be pursued by separate writ action within six weeks, failing which the trust proceedings would continue on the basis that the settlement agreement was valid and binding in accordance with its terms.

In this way, for the first time in Bermuda in Public Trustee v Cooper proceedings, the Court found a means of ensuring that the proceedings were not hijacked by those making unsubstantiated allegations of fraud, especially in circumstances where it appeared that the underlying motive for making the allegations was to defeat a settlement which was now regretted.

No separate writ action was brought to determine the legal validity of the settlement agreement, and the trust proceedings came back before the Court.5 At the adjourned hearing, the Court emphasised that a Public Trustee v Cooper category two application was not the place for allegations of fraud or impropriety to be determined, and it approved the trustee’s decision to implement the settlement agreement in light of a number of considerations which were properly taken into account by the trustee.

These considerations were as follows:

  1. By the time of the approval hearing the agreement had been substantially, and irreversibly performed.
  2. The agreement had been negotiated over a lengthy period by the adult beneficiaries after years of disharmony.
  3. The possibility that II shares might be sold on at a higher price was canvassed between the parties in the course of negotiations, and a price adjustment mechanism that might have covered what had now occurred was rejected by the branches of the family now in opposition.
  4. Having obtained the advice of a global consultancy,6 any adjustment that might have been made was of game-changing magnitude relative to the overall allocation.
  5. The trustee did not consider it right to re-open the asset under the Settlement Agreement, irrespective of whether there were set-aside grounds.

In a Public Trustee v Cooper category two application, the Court is concerned to see that the proposed exercise of the trustee’s powers is lawful and within the power and that it does not infringe the trustee’s duty to act as an ordinary, reasonable and prudent trustee might act, ignoring irrelevant, improper or irrational factors. The Court is asked to determine whether the decision made by the trustee is within the range of possible decisions which a reasonable and prudent trustee could have made; the Court is not concerned with the separate issue of what decision the Court itself would have made if required to do so.  In In the Matter of P Trusts the Chief Justice accordingly decided that the trustee had met this test.

1 The JE Settlement, the JP Settlement and the P Settlement.

2 Also acting for JE’s adult children, who had signed the settlement agreement.

3 In the Matter of the P Trusts [2023] SC (Bda) 31 Civ.

4 In addition this group included a representative of the unborn and unascertained beneficiaries of JP.

5 In the Matter of the P Trusts [2023] SC (Bda) 31 Civ. 20

6 Teneo

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