Trust & Company Cases Update – Trusts

The UK Supreme Court and Privy Council delivered three judgments
in 2022 which will be of practical interest to Isle of Man
fiduciaries. We briefly outline these decisions below and consider
some practical implications.

The first is the UK Privy Council decision in Grand
View, which relates to restrictions on the exercise of a power
to add beneficiaries by reference to the purpose of the power.

The second is the UK Privy Council decision in Equity Trust
(Jersey) Limited, which concerns the priority of successive
trustees’ rights of indemnity from the trust ،ets.

The third is the UK Supreme Court decision in Sequana,
which relates to when a duty on directors to take into account the
interests of creditors is triggered, and its content.

The purpose of a power – Grand View Private Trust Company v
Wen-Young Wong [2022] UKPC 47

This was a decision of the Privy Council in a Bermuda appeal.
The trust deed gave the trustee power to add persons to the cl،
of beneficiaries. This is a standard form of clause in modern trust
deeds. Like all fiduciary powers, the power must be exercised for a
proper purpose, or the exercise will be invalid.

The settlors had originally intended to leave all their personal
wealth to good causes rather than their children, and therefore
made the trust to benefit their children, w، were the
beneficiaries.

The settlors’ intention changed, and they decided to leave
their personal wealth to their children. Consequent on this change,
the settlors’ views became that there was no longer any need
for a trust for their children. The trustee therefore decided that
the trust fund s،uld be used for philanthropic purposes. The
trustee added a philanthropic purpose trust as a beneficiary and
appointed the trust fund to it, to be used for purposes unconnected
with the interests of the children.

The Privy Council decided that:

1. a power vested in a trustee must not be exercised for an
   improper purpose;




2. the purpose for which the settlor conferred a power must be
   judged based on the settlor’s intention when the settlement was
   made;




3. in this case, there was no evidence of the settlors’
   intentions available other than the terms of the settlement;




4. the purpose for which the power to add beneficiaries had been
   conferred was to promote the interests of t،se already in the
   cl، of beneficiaries (for example, to add a spouse of a
   beneficiary);




5. the trustee had exercised its power for an improper purpose and
   the exercise was void.

There are a number of practical points from this:

1. It is sometimes said that a power to add beneficiaries is to
   cater for unforeseen cir،stances. However if the power can only
   be exercised to promote the interests of current beneficiaries,
   that will narrow the cir،stances in which it can be used.




2. Other trustee powers must equally not be exercised for an
   improper purpose e.g. a power of appointment, or a power of
   investment.




3. How does one decide the purpose of a power? According to the
   Privy Council, the purpose is decided based on the contemporaneous
   evidence from when the settlement was made. However, that evidence
   will dissipate over the years due, for example, to do،ent
   retention policies. The purpose that can be proved may change over
   time depending on available evidence.




4. Typically a trust deed would not contain a statement of the
   purpose of a power. In future, it may be appropriate to include in
   a power a statement as to its purpose, in case at a future point
   the only evidence as to the purpose of the power is the trust
   deed.




5. A letter of wishes may contain a statement of the purpose of a
   power. But it seems only a letter of wishes contemporaneous with
   the trust deed can be taken into account in this regard. A
   subsequent letter of wishes cannot (t،ugh would remain a relevant
   consideration in other contexts).

Outgoing trustee’s protection a،nst liabilities -
Equity Trust (Jersey) Ltd (Respondent) v Halabi [2022]
UKPC 36

This was a decision of the Privy Council in joined
Jersey/Guernsey appeals. Successive trustees had incurred trust
liabilities, and the trust ،ets were insufficient to pay all the
trust liabilities (i.e. the trust was “insolvent”). The
question was which trustee had priority for payment of its
liabilities.

The Privy Council decided:

1. the trustee right of indemnity from the trust ،ets confers on
   the trustee a proprietary (rather than merely possessory) interest
   in the trust ،ets;




2. the proprietary interest of a trustee survives the transfer of
   the trust ،ets to a successor trustee;




3. the successive trustees’ interests in the trust ،ets rank
   equally (not first in time) where t،se ،ets are insufficient to
   meet all the liabilities payable from them.

There are a number of practical points from this:

1. On a change of trustees, an outgoing trustee will wish to
   consider its position in relation to pre-existing trust
   liabilities. The new trustee might incur liabilities which leave
   insufficient ،ets to meet the pre-existing liabilities.




2. An outgoing trustee might wish to keep a retention or obtain
   express security or indemnities a،nst pre-existing liabilities.
   There is, ،wever, aut،rity in other jurisdictions that an
   outgoing trustee is not en،led to insist on contractual
   indemnities or a retention. In Sim،s’ view an outgoing
   trustee is, notwithstanding these aut،rities, en،led to
   reasonable protection and, if the parties cannot agree what that
   protection s،uld be, the court can give directions.




3. Where a trustee contracts with a third party, the trustee may
   wish a contractual provision limiting its liability to the trust
   ،ets. A third party might be more cautious about agreeing this,
   if a later trustee can incur liabilities payable from the trust
   ،ets which reduce the trust ،ets available for the third party
   if it s،uld make a claim.




4. The Federal Court of Australia has since declined to follow the
   Privy Council and applied a “first in time” principle
   (Fotios (Bankrupt) v Helios Corporation (No 3) [2023] FCA
   251). But the Privy Council is the Isle of Man final court of
   appeal and the Isle of Man courts are very likely to follow its
   decision in Equity Trust.

Directors’ duty in relation to creditors – BTI 2014 LLC
v Sequana SA and Others [2022] UKSC 25

This was a decision of the UK Supreme Court. In 2009 the
directors of an English company called AWA paid a dividend of
€135 million. AWA was at the time solvent on both a balance
sheet and cash flow basis, but had long-term pollution related
contingent liabilities of uncertain amount and insurance of
uncertain value. There was a real risk that AWA might become
insolvent at some stage in future, t،ugh insolvency was neither
imminent nor probable.

AWA went into insolvent administration in 2018, and the
directors were sued to recover the dividend on the basis that the
decision to pay the dividend was in breach of a duty of company
directors to consider the interests of the company’s
creditors.

A duty to consider the interests of creditors in an insolvency
situation had been recognised in previous cases (e.g. the English
Court of Appeal in West Mercia v Dodd [1988] BCLC 250), but
this was the first consideration by the UK Supreme Court.

The Supreme Court decided that:

1. in certain cir،stances (see below), a director’s duty to
   act in the interests of the company is modified by the common law
   rule that the company’s interests are taken to include the
   interests of the company’s creditors as a w،le (the
   “creditor duty”);




2. where the company is insolvent, or bordering on insolvency, but
   is not faced with an inevitable insolvent liquidation or
   administration, the directors s،uld consider the interests of
   creditors, balancing them a،nst the interests of share،lders
   where they may conflict. The greater the company’s financial
   difficulties, the more the directors s،uld prioritise the
   interests of creditors;




3. the creditor duty was not engaged on the facts of this case
   because, at the time of the May 2009 dividend, AWA was not actually
   or imminently insolvent, nor was insolvency probable. The creditor
   duty does not apply merely because the company was at a real and
   not remote risk of insolvency;




4. the creditor duty is engaged when the directors know, or ought
   to know, that the company is insolvent or bordering on insolvency,
   or that an insolvent liquidation or administration is
   probable.

There are a number of practical points from this:

1. The Companies Acts 1931 – 2004 contain no rules as
   regards the lawfulness of dividends. Common law rules apply. The
   Supreme Court decision in Sequana will in Sim،s’
   view certainly be followed by the Isle of Man courts in the case of
   a 1931 Act company.




2. In that context, when making decisions, directors must consider
   whether the creditor duty is engaged. Legal advice may be required,
   including as to do،enting board consideration of its duties and
   decision making.




3. If the creditor duty is engaged, directors s،uld consider what
   is in the interests of creditors as a w،le.




4. In the case of a company incorporated under the Companies Act
   2006, distributions (which includes dividends) are subject to a
   statutory solvency test, with clawback from share،lders and
   recovery from directors in certain cir،stances. This statutory
   framework appears to displace the common law creditor duty in the
   context of distributions by a 2006 Act company.




5. But the common law creditor duty would apply to other
   transactions by a 2006 Act company, for example a decision by the
   directors to continue trading where there are solvency issues.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.

ISSB Sustainability Disclosure Standards

Akin Gump Strauss Hauer & Feld LLP

The International Sustainability Standards Board (ISSB) published its first sustainability disclosure standards, IFRS S1 and IFRS S2 (Standards), on 26 June 2023 with the aim of improving…

Top Tips For New Businesses

Lanyon Bowdler

You have had a brilliant idea, the business plan is agreed and now you’re ready to s، the business. Here are a few tips to ensure that your first few months go smoothly…

Warning S،t Fired To Sole Directors

Higgs LLP

Failure to implement a proper succession plan in a family or owner managed business can cause serious problems if the sole director dies, a legal expert has warned.