Read our article in the Cayman Financial Review Magazine, eversion
A trustee is duty bound to act strictly in accordance with the terms of the trust and within the parameters of the powers that it is granted. A trust instrument may provide a trustee with the power to adapt a trust structure to changing circumstances, thus ensuring that it does not fall out of step with convention, with beneficiaries’ circumstances or with changes in the law but sometimes it does not.
The court in the Cayman Islands, as in England, will not readily interfere with the terms of a trust nor will it allow a trustee to depart from its terms, other than in certain clearly delineated circumstances. What can a trustee do in those circumstances.
One option is to use s63(1) of the Cayman Islands Trust Law (2009 Revision) which has been described as:
"… empower[ing] the court to confer on trustees any absent but, in its opinion, expedient powers, subject to any provisions and conditions it thought fit."
Unlike s72 of the Trusts Law which is directed to variation of the beneficial interests, there is no requirement under s63(1) for beneficiary consent nor any need to show "benefit" to any class of beneficiary. The principal criteria is that the conferral of the power is "expedient" and in the best interests of the effective management and administration of the trust property. Alteration of the beneficial interests is not permitted by this route, unless "incidental" to the exercise of the power conferred by the court.
MEP v Rothschild
The Cayman Islands case of MEP and MPQ v Rothschild Trust Cayman Limited & ors2 exemplifies the use of s63(1) in the constructive restructuring of trusts.
It was proposed to partition the trust fund in order to put into effect the final elements of what was described as a "peace agreement"3 designed to bring to an end years of litigation between family members. The partition would allow for the division of the trust fund according to each branch of the warring family, thereby allowing the trustee to consider what the chief justice described as "the divergent financial and practical needs of each branch of the family".
The first question considered and rejected by the Chief Justice was whether there was another, more appropriate, means by which the aims of the beneficiaries and trustee could be achieved. The chief justice concluded that if the s63 jurisdiction could be invoked, it was the sensible and appropriate way to proceed. Dividing a trust fund so that the interests of warring parties were kept apart and in a way that allowed the trustee to deal with their differing needs in separate funds, satisfied the requirement of expediency.
The partitioned funds were to be held on the same underlying trusts of the Z Trust. The only alterations to the terms were in relation to the management committee and power of appointment and removal of trustees. The question for the chief justice was whether the fact that the whole fund was to be divided into three separate funds would mean that the beneficial interests were to be altered. The chief justice found that if there was an alteration, it was "incidental" to the proper exercise of the power to be conferred by s63 and so it was permitted.
Sutton v England
Justice Mann in the English case of Sutton v England [2009] EWHC 3270 (Ch) took the contrary view only months after MEP. He rejected an application by the trustees of the England settlement under s57 of the Trustee Act 1925, (the English equivalent of s63) for powers to appropriate and partition a trust fund to create a separate sub-fund for one branch of the family, all of whom were resident in the US.
There were obvious fiscal benefits to the US resident beneficiaries which would be obtained in partitioning the fund but, most importantly, a partition would assist the trustee in the management and administration of the trust property so as to be free to deal separately with very different and conflicting needs of the two sides of the family.
Justice Mann rejected the submission that any alteration of the beneficial interests in the partition of the fund would be "incidental" to the management or administration of the trust property.
He also distinguished the case before him from MEP. The proposed partition was to result in trusts of the entire income over a divided fund, half the size of the original trust fund. For that reason, Justice Mann seemed to regard the application as a variation dressed up as something else.
He concluded that while s57 could confer an expedient management or administrative power, it was not wide enough to allow trustees to create new beneficial interests. The beneficiaries should have made their application under the Variation of Trusts Act 1958, the equivalent of s72 of the Trusts Law, despite the fact that it was made plain that this had been explored by the two sides of the family and had been rejected as unworkable.
The Court of Appeal
The Court of Appeal in its judgment, went straight to the heart of the conundrum: does the conferral of powers by the court to partition the fund incidentally affect the beneficial interests in the trust property or does it go further than that and alter or vary them; on which side of the line does the application fall?
The Court of Appeal concluded that Justice Mann had approached the question from the wrong starting point. The first enquiry should be whether the trustee has a problem in the management or administration of the trust property and whether that problem would be resolved by conferring them with the power they sought.
Secondly, it was submitted that the judge wrongly characterised the proposal as directed to the alteration of the beneficial interests. Leading counsel for the trustee and beneficiary parties argued that what was proposed was simply a conceptual change in how those interests were to be enjoyed.
The Court of Appeal agreed. Justice Mann had relied heavily on a case called Re Freeston's Charity [1979] 1 All ER 51 in his judgment. The Court of Appeal distinguished Re Freeston for a number of reasons, not least the fact that it was not a case about the application of s57 and the statement of Goff LJ, on which Justice Mann had relied in his judgment, although made in response to a suggestion from counsel that the application before him should have been made pursuant to s57, was technically obiter.
While it was acknowledged that "the advantages from the point of view of investment and administration in keeping a large fund intact may be substantial"4, the Court of Appeal found that it was not authority for the proposition that partition of a trust fund is always a variation or re-arrangement of the beneficial interests nor does it always have more than an incidental impact on those interests.
Furthermore, there were no difficulties in Freeston in the management or administration of the trust property, so no suggestion of expediency which would have justified the conferral of a power of partition. In Sutton, the trustees had to act even-handedly between two beneficiary families with completely divergent financial and practical needs, very similar in that respect to the position in MEP.
The Court of Appeal was also assisted by a letter which Justice Mann did not have at the hearing before him, explaining the factual background to MEP. As a consequence, the Court of Appeal understood that the facts in MEP were "practically identical to those in this case"5.
The Court of Appeal was also given additi onal information about the prospects of success in a variation application and was convinced of the likely difficulty in obtaining the necessary consent from all the adult beneficiaries to such an application. Accordingly, the Court of Appeal allowed the appeal.
Future restructuring applications
The Court of Appeal's finding that the Chief Justice in MEP was correct in his analysis of the "incidental" nature of a change in the beneficial interests as ancillary to the conferral of an expedient power of partition, is undoubtedly helpful. It confirms that if trustees have a significant difficulty in the management or administration of the trust fund which could be remedied by the conferral of a power which they do not have, s63 may assist, even if there may be an incidental change in the beneficial interests.
However the Court of Appeal firmly supported Justice Mann in adopting a cautious approach to the exercise of the jurisdiction and was at pains to reinforce the principle that the courts of equity will not readily interfere with the terms of a trust.
This is not a jurisdiction which the court will exercise lightly and so, before making an application under s63 of the Trusts Law in the Cayman Islands, the question to bear in mind is: 'on which side of the line does your application fall?'
Endnotes:
- Mr Justice Foster in HSBC International Trustee Limited v Registrar of Trusts, Earl of Dalkeith and the Attorney General [2008] CILR, N-5
- [2009] CILR 593
- MEP v Rothschild [2009] CILR 593, at 596
- [1978] 1 WLR 120, at 128A
- Southgate v Sutton [2011] EWCA Civ 637, para 39