Re Trusts (Guernsey) Law, 2007; the AAA Children’s Trust; the Trustees WTLR 683

Analysis

The application concerned a trust, (the Children’s Trust) which, along with another trust (Trust 3), were discretionary trusts settled by the settlor for the benefit of his widow (R1), their children and their future issue. Trust 3 operated principally for the benefit of R1 and the Children’s Trust principally for the benefit of the children. The Children’s Trust had two protectors, P1, the settlor’s sister, and P2, the settlor’s business associate. The application was made by the trustees of the Children’s Trust (A1, A2 and A3 (the trustees)) to bless what the trustee’s considered to be a momentous decision involving the sale of a significant property (the property). The application was supported by P2 but strongly opposed by R1, the children and P1.

The property was owned by a company (the company). Three nominees (P2, A3 and R1) held 49.5% of the shares in the company on behalf of each of the two children, with the remaining 1% held by R1 in her own right. Decisions of the three nominees could be taken by a majority and since A3 and P2 had indicated that they supported a sale of the property, they had thus outvoted R1.

The bulk of the money required to purchase the property and carry out alterations and remedial work had been advanced by the trustees to the company by way of secured promissory notes. The share certificates in the company were held by the trustees as security for those notes. The notes bore interest at a commercial rate but there was no expectation that any interest would be paid. The operations of the company were governed by a formal agreement and it was accepted that any sale of the property could not proceed without the consent of the trustees.

A memorandum of wishes incorporating wishes indicated by the settlor during his lifetime had been incorporated as a schedule of the Children’s Trust. The memorandum made clear that it was not intended to create any binding trust or obligation or to fetter in any way the exercise of the discretions vested in the trustees or protectors. The memorandum stated that the property had been purchased for the sole purpose of the children having a roof over their own heads and that the settlor wished the trustees to leave such funding in place until the children turned 40 and not to call in any loans from the company before then unless the property was sold before that time. It further stated that the settlor did not wish either child to dispose of their interest in the property before they attained the age of 40 and that even after the age of 40 he did not want them to dispose of their interest as the property had been acquired to protect their long term interests and security. It further stated that the settlor wished that no sale of part of the property should take place before the children turned 40 unless there were extraordinary changes in the City.

The opponents to the application emphasised what they considered to be flaws in the decision making process followed by the trustees. The trustee’s reasons for the sale were difficult to identify there being no clear cut decision to accept the proposed offer to sell, but could be summarised as an anonymised issue, the property bubble, valuation evidence, concentration of risk, capital erosion, R1’s spending and the children’s lifestyle and emotional factors.

Held, dismissing the application and refusing to grant the blessing sought, that:

1. 1) The application was made under the second category of case in Public Trustee v Cooper [2001] WTLR 903 therefore the questions to be considered were:
2. a. Does the trustee have the power to make this ‘momentous decision’?
3. b. Is the court satisfied that the trustee formed the opinion in good faith and that it was desirable and proper for them to make the decision?
4. c. Is the court satisfied that the opinion formed by the trustee is one which a reasonable trustee in its position properly instructed could have arrived at?
5. d. Is the court satisfied that the opinion arrived at by the trustee has not been vitiated by any actual or potential conflict of interest which either had or might have affected its decision?
6. 2) In dealing with such an application, the court is not exercising a discretion but, in effect, making a declaration that the trustees’ proposed exercise of the power is lawful, in other words that the trustees were acting honestly, that in reaching their decision they had taken into account all relevant matters and had not taken into account any irrelevant matters and they had not reached a decision that no reasonable body of trustees could have reached.
7. 3) The consequence of the court blessing the decision would be that no beneficiary could later challenge the decision. Accordingly caution should be exercised in deciding whether to bless the decision and if the court is left in doubt by the evidence it should withhold approval.
8. 4) In the present case, the court had jurisdiction to bless the transaction even though the property was held outside of the trust and the trustees’ connection with the property was as a creditor under the promissory notes issued in favour of the company as the application was for a blessing to implement and give effect to the sale and take all such steps as may be required to carry into effect the same not for a blessing to sell the property.
9. 5) There was no dispute that the proposal to take steps to effect the sale of the property was a ‘momentous decision’. It was a significant asset of the children’s trust and the importance of the decision was rendered all the more significant by the settlor’s expressed wishes that the property be retained for the benefit of all the children to protect their long term interest and security. R1 and P1’s opposition to the decision were additional factors that rendered it appropriate to seek the court’s blessing. Further it was accepted that the trustees had the power under the trust instrument to make the momentous decision. The real question was whether the trustees had taken into account all relevant matters, not taken into account any irrelevant matters and not reached a decision that no reasonable body of trustees could have reached.
10. 6) It was impossible to pinpoint a meeting of the trustees at which the momentous decision was taken. It appeared to be a rolling decision taken over a long period of time, discussed in telephone conversations of which no file notes were created and considered in a multitude of emails which were not produced. Such failure of disclosure was unforgiveable especially when the trustees’ advocate had been pressed on numerous occasions to ask whether there had been full disclosure. The importance of full and complete disclosure in a case such is this was to enable the other parties to understand what considerations were taken into account by trustees in reaching a momentous decision. Otherwise they could not be satisfied that the trustees had properly exercised their powers. Hence full disclosure of all relevant evidential material should have been made available to the other parties and such as was relevant and necessary to the application should have been laid before the court.
11. 7) It was surprising that professional trust administrators did not prepare a dossier of relevant information for consideration by the trustees at a meeting convened for the purpose of considering the momentous decision and that they did not convene such a meeting. If they had done so, what matters were considered would have been known and if they had produced a thorough and comprehensive minute of their deliberations, it would have been possible to review the decision for the purpose of assessing its propriety.
12. 8) There were a number of factors for the trustees to consider including the wishes of the settlor, the value of the property, the erosion of capital and other options to reduce this; the anonymised issue and the wishes of the children, R1 and P1. The court could not bless the decision unless it was satisfied the trustees had approached the process in a proper and satisfactory manner. However, it was impossible to discern what the trustees had in their minds at the relevant times:
13. a. It was not possible to decide whether the settlor’s wishes were properly considered;
14. b. It was unclear what advice the trustees had been given at the time as to the value of the property:
15. c. There was insufficient evidence to show that they had properly considered other options to reduce the level of distributions by curtailing the extraordinarily extravagant and expensive lifestyle of the children or what could be done to prevent or limit leakage of income to R1;
16. d. It was unclear what advice was available to them concerning the anonymised issue, such advice may have been inadequate and a reasonable trustee would have ensured he received a more comprehensive briefing, preferably in writing, given the complexity of the issue and would not be content to rely on oral advice. Further it was not clear whether the implications of the decision in respect of the anonymised issue were properly considered when deciding to sell the property; and
17. e. It was impossible to tell what account the trustees took of the wishes of the children, R1 and P1.
18. 9) In the circumstances it was impossible to say that the proposed transaction should be blessed by the court. On the other hand, the court could not conclude that the decision is one that no reasonable trustee could properly take. Therefore the only option was to decline to bless the transaction.

Judgment RICHARD JOHN COLLAS, ESQ., BAILIFF: The judgment of the court has been redacted to enable it to be published as the hearing was largely concerned with matters pertaining to certain minor children. Introduction [1] This is a trustees’ application within the second category identified in Public Trustee v Cooper [2001] WTLR 903 to bless …

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