"Eschewing Neutrality – Trustees’ Duties when faced with Adverse Claims to Trust Assets" (1 September 2014, 12.00pm – 2.00pm, Level 3, Intellioffices, 146 Robinson Road)
The following write-up is kindly contributed by Paul Tracey - Consultant, Grosvenor Law, further to his seminar for STEP Singapore on 1 September 2014 chaired by Annette Sui, Managing Director and Head of Private Wealth Solutions, Southeast Asia, HSBC Private Bank.
An attack on a trust, by way of a claim asserting a superior proprietary right to trust assets than that enjoyed by a trustee or a trust beneficiaries, necessarily presents a problem for the relevant trustee.
A claimant may, for example, claim that he or she had a legal or beneficial proprietary interest in the trust property preceding in time the creation of the legal and equitable rights that constitute the trust and then seek to assert a right to follow his or her earlier, alleged proprietary interest into the trust property.
A claimant may also claim that he or she has a claim against the settlor and that, contrary to the trust purported effect, the settlor retains or now has a proprietary interest in the trust property susceptible to charge or seizure in the enforcement of any judgment following the relevant claim against the settlor.
A claim challenging a trust existence or disputing the legal or beneficial ownership of the property on the trust are to be distinguished from litigation arising out of the execution or interpretation of a valid trust or other litigation against or by third parties by or against the trustee qua trustee e.g. breach of contract or duty of care claims.
When a claimant seeks to impeach a trust or assert adverse title to a trust's legal title; it would seem a fundamental aspect justifying this conclusion or principle is that, so long as the trustee remains neutral and complies with any court order, he or she will get his or her (necessarily limited) costs.
However, answering the question of whether a trustee should itself take a stand against a claim to trust assets in challenge to the trust on which such assets are held by a trustee simply by asking what will protect best the trustee's fundamental duty to the beneficiaries to discharge the express trusts which he or she has voluntarily accepted and to take little or no account of what a trust's beneficiaries are properly entitled to expect of their trustee.
A trustee does, of course, have a right to seek the court's directions as to whether to defend a claim or not and directions as to what he or she should do as to his or her potential liability. Absent such directions, a trustee may be liable for distributions made in the face of the claim against the trust and, if the trustee chooses to defend the claim and loses, obviously also for the claimant's costs in pursuing the claim. So, it may be trite to say that the earlier such an application is made, the better but no less true for that.
It is not arguable that the proposition that a trustee is obliged to be neutral when faced with a hostile challenge to the trust's existence has not been overwhelmingly accepted as correct in the onshore common law world. This is, however, not necessarily the case in at least two offshore jurisdictions: see In the matter of Poyiadis, In the matter of Hall.,2 Barclays Private Bank & Trust (Cayman) Ltd v McLaughlin & ors,3 and Bridge Trust Company Ltd & Anor v Attorney General & ors.4
However, as a practical matter, a trustee will always want to respond pragmatically and quickly to any claim to a trust's assets by considering the strength of such claim and making a Beddoe application. The risk of not seeking Beddoe authorisation (or the Court's authorisation of your proposed actions as trustee in some form) is not to be contemplated.
One final point to consider is that the Royal Court of Jersey in In the matter of the PW Trust and in the matter of the Representation of BNP Paribas Jersey Trust Corporation Limited has given guidance for trustees on notice of a claim to trust assets but where litigation has not been commenced. The Royal Court there held that, unless the claimant commenced proceedings within a particular time, the trustee shall be entitled to administer the trust free and clear of all any claims which [the claimant] might or purport to have to the assets of the trust (save as a beneficiary of the trust)?.
Contributed by: Paul Tracey - Consultant, Grosvenor Law