Analysis
In 1994, by a series of trust deeds, Mrs Pesenti established four settlements in the Isle of Man known as the RR1, RR2, RR3 and RR4 Trusts, each of which was for the benefit of one of her children and his/her heirs. The RR2 Trust (the trust), which alone formed the subject of this case, took as its beneficiaries the appellant and her issue born before the perpetuity date, together with two named charities. The dispositive provisions of the trust required the trustees to hold the trust fund and its income on discretionary trusts for all or such one or more exclusively of the others or other of the beneficiaries with wide powers of appointment of the trust fund or part of it for their advancement or benefit at the absolute discretion of the trustees.
All four of the trusts had originally had a protector. A Mr Luigi Aldrighetti was appointed the protector of all four trusts in June 1994, within five days of the execution of the trust deed, but died in 1998. He was succeeded by a Mr Italo Lucchini that year. Mr Lucchini in turn resigned as protector of the four trusts on 27 October 2017. He had nominated a Mr Luca Minoli as his successor, but Mr Minoli declined each of the offices. There had therefore been no protector in respect of the trust since Mr Lucchini’s resignation in 2017.
The trust deed provided for the nomination by a protector of his/her successor, and also for the nomination of one or more alternative successors, to assume office should the candidate protectors nominated before them fail to qualify. A legal or natural person was expressly disqualified from being appointed as protector if they were a trustee or if they were domiciled, resident or ordinarily resident in the jurisdiction which was at the relevant time the forum for the administration of the settlement. In the absence of a protector, the powers of the protector would vest in the trustees. The protector enjoyed a number of powers and entitlements under the trust deed, including the power to remove trustees or appoint new trustees, the power to reach agreement with the trustees as to the trustees’ fees, and the entitlement to have produced to him/her any accounts (such accounts not being available to the beneficiaries, by virtue of an express provision of the trust deed to that effect).
The appellant and another child of the settlor had commenced proceedings in Milan (the Italian proceedings) against a number of family members, and also other parties associated with the trust, the purpose of which had been described by the appellant’s lawyer in those proceedings as claiming damages for failure to take into consideration the rights of the Italian plaintiffs as heirs to Mrs Pesenti’s succession, and maintaining an ‘invalidity claim’ under which the whole structure established by Mrs Pesenti was attacked.
The appellant had sought the appointment of a protector for the trust and had nominated possible candidates for the role. The respondent had consistently taken the position that it was not minded to appoint a protector, but would keep the matter under review. At one stage the respondent had clarified that, although it was not obliged to give reasons for its decision, its reasons in outline were the following:
- (1) The trustee did not consider there was any need to appoint a protector for either trust at that time. The only substantive reason which had been advanced by the appellant and her sister had been to ensure the provision of financial information, but as that was being provided anyway, it was unnecessary to appoint a protector to the trust.
- (2) Furthermore, the four trusts were involved in acrimonious litigation in Italy which had caused conflict within the family and the respondent did not wish to take any unnecessary steps which might add to those hostilities.
- (3) All the trusts settled by Mrs Pesenti had considerable inter-relationships of trust assets and in some cases of beneficiaries. Those inter-relationships required some unity of decision-making across the trust structures. With that in mind it would not be desirable for the RR2 and RR3 settlements to have protectors, or different protectors to the other trusts, without good reason.
- (4) The trustee considered that it was essential that any individual considered for the role of protector should be impartial and independent in relation both to the family and the Italian proceedings in order to avoid any further aggravation within the family. The trustee had to deal fairly with all of the beneficiaries. Given the hostile litigation, it was difficult to conceive of an individual who might be regarded by all of Mrs Pesenti’s descendants as impartial and independent.
At first instance, Deemster Christie found that the power to appoint a new protector was discretionary and that there was no obligation on the trustee to exercise it. He moreover rejected the criticisms of the trustee made by the appellant, including that the trustee had ‘dragged its feet’ and had not properly considered the wishes expressed by the appellant, or had failed properly to consider the decision which it was required to make. His conclusion was that the trustee had displayed a conscientious and proper approach to the decision-making exercise which it was its duty to perform. Deemster Christie concluded that the reasons given were relevant and accordingly he should not direct the trustee either to exercise the power to appoint a protector or to reconsider the decision which had already been taken.
Held:
The court allowed the appeal and quashed the order below.
The Deemster had been correct to find that this was a discretionary, rather than an imperative, power. However, as with all discretions which are capable of being reviewed by a court, it was essential that the decision-maker had taken into account all relevant considerations and excluded from account all irrelevant considerations, and that the decision-maker had not reached a conclusion which was so unreasonable that no reasonable decision-maker in their position could have reached it.
Taking the reasons that had been given by the respondent in turn, it was wrong to say that there was no need to appoint a protector because the appellant and her sister were being provided with financial information in any event. First, there was a profound difference between being provided with financial information at the discretion of the trustee and having an entitlement to financial information together with an entitlement to press for clarification or further information. The protector had not only the ability to apply to court for an order directing the trustees to do that which the trust deed requires them to do, but also the ability to compel the trustees directly to perform their functions, by the exercise of his/her power of dismissal of trustees. Moreover, obtaining financial information was not the only function of the protector. The powers conferred on the protector were intended to ensure the proper exercise of the powers of the trustees. The trustee appeared to have considered the need for the appointment of a protector solely in the context of the provision of financial information to beneficiaries. In so doing, the trustee was in error.
As to avoiding causing hostility in the family in the context of the Italian proceedings, this would have been a proper consideration for the trustee only if ‘family’ meant only the appellant and her issue. If, however, it meant it would be in the interests of the wider family, the trustee would have taken into account the interests of those who were not beneficiaries in deciding whether or not to exercise the fiduciary power to appoint a new protector. On balance, ‘family’ probably had the wider meaning for these purposes, and it would be surprising to conclude that it was a good enough reason to justify not appointing a protector in the light of the acrimony which the Italian proceedings might have been expected to engender in any event.
It was not necessarily appropriate or desirable at the present time that the trust should have the same protector as the other trusts. As to the purported need for any protector to be impartial and independent in relation both to the family and the Italian proceedings, it was accepted in oral argument that ‘family’ here extended to the wider family. Thus the trustee’s suggestion was that the protector of the trust should be impartial and independent in relation to litigation between the appellant and other members of her family when the appellant is a beneficiary of the trust but the other members of the family are not. The trustee in giving such a reason for its decision was acknowledging that it was taking into account the interests of people who were not beneficiaries of the trust for the purposes of deciding whether to exercise its fiduciary power to appoint a protector. In deciding on the approach to the Italian proceedings, the trustee should have recognised that the interests of the trust might well lie in supporting the appellant in those proceedings. In so doing the trustee might encounter a difficulty in its role as trustee of the RR1 and RR4 trusts, in that the adult beneficiaries of those trusts might be adamant that the appellant’s attack should be resisted at all costs. That demonstrated the potential conflict of interest which the trustee had. An independent protector of the trust would be able to ensure that the trustee addressed that potential conflict appropriately.
Therefore, at least three of the reasons taken into account by the trustee in deciding not to appoint a protector were irrelevant and the remaining one was at best of doubtful relevance. Although the power to appoint a protector was not an imperative power, the trustee should have taken into account the inbuilt preference within the trust deed for a protector to be appointed, and should have appreciated the expressed intention in the trust deed that while the trustee had the power to appoint a protector, the trustee itself is not qualified to be a protector (albeit that, until a new protector is appointed, it is to exercise temporarily the protector powers). The trust deed itself precluded the protector from being resident in the jurisdiction which is the forum for the administration of the trust. From that it followed that the exercise of protector powers would be expected to take place in a jurisdiction other than the Isle of Man, and hence not by the trustee. It should also have taken into account the fact that there was a direct conflict of interest, not only in relation to the conduct of the Italian proceedings but also in relation to the necessary dealings which the protector is expected under the trust deed to have with the trustees.
Therefore the decision of the trustee not to appoint a protector could not stand, and the court directed it to reconsider.
JUDGMENT HHJ STOREY QC, DEEMSTER BAILHACHE AND DEEMSTER CORLETT: Introduction [1] This appeal concerns the decision of the Respondent trustee [the ‘Trustee’] not to appoint a protector to a Manx trust. It raises questions of construction and the power of the court to review decisions of trustees and potentially to give directions to a trustee. …Continue reading "Mazzoleni v Summerhill Trust Company (Isle of Man) Ltd [2021] WTLR 1409"