Navigating Trust Disputes: Strategies for Trustees to Safeguard Assets

1. 5 April 2019 – Step Mauritius Fiduciary and Trust litigation: How to avoid it Peter Gillis, Stephenson Harwood LLP

2. Introduction • Different types of trust dispute • Guidance for trustees facing each type of trust dispute and how they may be able to protect themselves • Recent cases in 2018

3. Types of trust dispute • ‘Trust’ dispute – dispute about the terms or administration of the trust • Questions regarding the construction of the trust instrument • How should the trustee exercise its powers? • ‘Hostile’ trust disputes • ‘Beneficiary’ dispute – dispute arising from a beneficiary alleging misconduct/breach of trust • ‘Third party’ dispute – bringing or defending claims from/against third parties

4. Type 1: ‘Trust’ disputes How to approach a ‘trust’ dispute • Main concern is the risk of acting in breach of trust • Possible options for the trustee are: • 1. Go ahead and act • 2. Obtain the consent of the beneficiaries • 3. Obtain directions from the court • England – Civil Procedure Rules • Mauritius – Section 62 of the Trusts Act 2001

5. Type 1: ‘Trust’ disputes Directions of the court • Questions of construction of the trust instrument • Guidance to the trustee in the exercise of its powers: • ‘Blessing’ applications – where there is no real doubt, but a decision is ‘momentous’ • Court is principally concerned with: • Rationality • Honesty • Surrender of discretion cases

6. Type 1: ‘Trust’ disputes Recent cases from 2018 • South Downs Trustees Ltd v GH [2018] EWHC 1064 (Ch) – England and Wales • Trustee held 73% of the shares in a holding company • Trustee received an offer to purchase underlying business • Offer was a better outcome for beneficiaries than if business remained in trust and the trustee decided to accept • Trustee sought judicial blessing of decision • Court granted the application • The court found the trustee had taken a “structured and logical” approach • Potential conflict of interest was carefully investigated and managed

7. Type 1: ‘Trust’ disputes Recent cases from 2018 • Re H Trust [2018] JRC 171 - Jersey • Trust asset was a residential property in London worth £1m • Illiquid with £112k of outstanding management fees owed to the trustee • Trustee wanted to sell property and distribute proceeds • Trustee applied to court for directions – it was opposed by all beneficiaries • Court found: • Trustee had not dealt with the conflict of interest – this was fatal to the application • Trustee had not obtained tax advice • Trustee needed to give reasonable time to beneficiaries to identify an alternate funding proposal

8. Type 2 ‘beneficiary’ disputes • Hostile disputes between the Beneficiaries and the trustees founded on allegations of misconduct • Examples include: • Negligent management of trust assets • Not acting impartially between beneficiaries • Distributing funds to someone not within the beneficial class • Acting without taking tax advice

9. Type 2 ‘beneficiary’ dispute How to protect against a ‘beneficiary’ dispute • Prevention is better than cure • Ensure there are adequate protections in the trust deed: • Exoneration provisions • ‘Anti-Bartlett’ clauses • Duty to diversify assets • ‘Undo’ transactions in breach of duty using doctrines of: • Equitable mistake • The ‘Re Hastings Bass’ Principle

10. Type 2 – ‘Beneficiary’ disputes ‘Undoing’ transactions • Mistake: Transaction may be set aside where there is a discrepancy between the trustee’s intentions and the effect of the transaction • Re Hastings Bass: Transaction may be set aside where: • The Trustee has done something within the terms of its power • The trustee has failed to take relevant considerations into account - this must amount to a breach of duty • Doctrine narrowed following English Supreme Court decision in Pitt v Holt [2013] UKSC 26

11. Type 2 – ‘Beneficiary’ disputes Recent cases from 2018 • M v St Anne’s Trustees Ltd - Guernsey • Beneficiary borrowed from trust to fund a divorce payment • Beneficiary repaid loan with transfer of companies to the trust worth more than the loan • Trustee made balancing payment which triggered significant income tax liability • Trustee sought to set aside the transaction under the Re Hasting Bass principle

12. Type 2 –’Beneficiary’ disputes Recent cases from 2018 • M v St Anne’s Trustees Ltd - Guernsey • First Guernsey case following English Supreme court decision in Pitt v Holt • First instance court refused application on basis it would be “unconscionable” • Guernsey Court of Appeal: • Proceeded on assumption that Guernsey law would follow Pitt v Holt • No “unconscionability” requirement • Codification in other jurisdictions

13. Type 3 - ‘third party’ disputes Issues for the trustee in a ‘third’ party dispute • Trustee bringing or defending claims against third parties • Main issue for trustee is to ensure that it is indemnified • Normal cost rules will apply in litigation (loser pays) • Indemnity from the trust? • Apply to court for a “Beddoe” order to protect the trustee • Procedure is a mini trial • Normally made before the third party claim is started

14. Type 3 – ‘third party’ disputes Recent cases from 2018 • The Stingray Trust 2018– Cayman • Proceedings attacking trust issued in Switzerland • The trustee defended the claim • Shortly after the Swiss proceedings were dismissed the trustee applied for “Beddoe” relief • Before it could be heard similar proceedings were issued in Milan • Court granted “Beddoe” application: • It was necessary to defend the application as there was a substantial risk to the trust – although sanction was not open ended • Failure to apply prior to defending Swiss proceedings was understandable

15. Type 3 “third party” disputes Recent cases from 2018 • Investec Trust (Guernsey) Ltd v. Glenalla Properties Ltd [2018] UKPC 7 • Mauritius – Section 36(1) Trusts Act 2001

16. Fiduciary and Trust litigation: How to avoid it Peter Gillis Stephenson Harwood LLP +44 207 809 2221 Peter.Gillis@shlegal.com