IFG International & ors v French 2012 CHP 0048

Analysis

The four claimants were professional trustees of a total of nine trusts, all governed under Isle of Man law. Some of nine trusts were created for the benefit of Samuel Wyly and his immediate family and the remainder for his brother Charles Wyly and his immediate family.

Michael French, the defendant, was either a protector or a member of the committee of trust protectors for each trust. He retired from all these positions in December 2000.

Proceedings had been brought against Mr French and the Wyly brothers in New York by the US Securities and Exchange Commission (the SEC) alleging tax fraud and insider trading. It was alleged that the nine trusts were used in the fraud. Proceedings had not been brought against Mr French’s joint protector.

Some of the trusts stated that an indemnity ‘may’ be granted to a protector while other trusts said the protector had a mandatory right to be indemnified unless the liability was cause by their own fraud. The trustees submitted that the SEC was taking action against Mr French for creating his own offshore entities and for alleged illegal conduct in his different roles as lawyer and advisor to the Wylys and as a director of US companies as well as in his role as a protector.

Mr French claimed that he was entitled to be indemnified out of assets of the trust in respect of his costs of defending the SEC proceedings and that as a protector in a fiduciary position he had an implied right to be indemnified. The SEC proceedings allege that the trusts are a sham and therefore his duty was to actively defend the proceedings to protect the beneficiaries.

The trustees applied to the court for directions.

After the hearing the parties settled the claim by negotiation with no order as to costs but the parties approved the judgment being handed down because of the novel issues of law it raised.

Held (allowing the trustees to delay making a decision):

1. (1) Where the trustees have discretion as to whether to indemnify, then they have a duty to make proper enquiries to inform themselves and to act honestly and in good faith.
2. (2) Mr French alleged that he needed to defend the action so as to act in the best interests of the beneficiaries, but they had not even been notified of the application.
3. (3) The fact that Mr French’s joint protector had not had proceedings issued against him did not determine if Mr French’s alleged fraud arose out of his role as protector.
5. (4) It is not for the trustees to determine the SEC complaint and therefore it is appropriate for the trustees to await the outcome of the SEC proceedings before deciding whether to grant the indemnity requested given that there is an allegation of personal fraud.
6. (5) Only once the proceedings are determined will the trustees be able to make a fully informed decision.
7. (6) Given the that Wyly family are vigorously defending the proceedings it is unnecessary for Mr French to defend the trust, and given that he retired over ten years ago Mr French has no legal duty to do so.
8. (7) No indemnities can be implied when the settler has deliberately set out what indemnities are to be afforded to a protector.
9. (8) When the trustees come to decide whether to afford Mr French an indemnity they should also consider the deed of release signed when he ceased to be a protector, his own financial situation, and the nature of any other funding available to him.

JUDGMENT His Honour Deemster Corlett Introduction [1] The four claimants are each trustees of a total of nine trusts, all of which are governed by Isle of Man law, the majority of which were originally settled by one Samuel E Wyly or his brother Charles Wyly, one of which was originally settled by one Keith …

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