The UK Supreme Court and Privy Council delivered three judgments in 2022 which will be of practical interest to Isle of Man fiduciaries. Kevin O’Loughlin briefly outlines these decisions below and considers some practical implications.

The first is the UK Privy Council decision in Grand View, which relates to restrictions on the exercise of a power to add beneficiaries by reference to the purpose of the power.

The second is the UK Privy Council decision in Equity Trust (Jersey) Limited, which concerns the priority of successive trustees’ rights of indemnity from the trust assets.

The third is the UK Supreme Court decision in Sequana, which relates to when a duty on directors to take into account the interests of creditors is triggered, and its content.

The purpose of a power – Grand View Private Trust Company v Wen-Young Wong [2022] UKPC 47

This was a decision of the Privy Council in a Bermuda appeal. The trust deed gave the trustee power to add persons to the class of beneficiaries. This is a standard form of clause in modern trust deeds. Like all fiduciary powers, the power must be exercised for a proper purpose, or the exercise will be invalid.

The settlors had originally intended to leave all their personal wealth to good causes rather than their children, and therefore made the trust to benefit their children, who were the beneficiaries.  

The settlors’ intention changed, and they decided to leave their personal wealth to their children. Consequent on this change, the settlors’ views became that there was no longer any need for a trust for their children. The trustee therefore decided that the trust fund should be used for philanthropic purposes. The trustee added a philanthropic purpose trust as a beneficiary and appointed the trust fund to it, to be used for purposes unconnected with the interests of the children.

The Privy Council decided that:

a. a power vested in a trustee must not be exercised for an improper purpose;

b. the purpose for which the settlor conferred a power must be judged based on the settlor’s intention when the settlement was made;

c. in this case, there was no evidence of the settlor’s intentions available other than the terms of the settlement;

d. the purpose for which the power to add beneficiaries had been conferred was to promote the interests of those already in the class of beneficiaries (for example, to add a spouse of a beneficiary);

e. the trustee had exercised its power for an improper purpose and the exercise was void.

There are a number of practical points from this:

  1. It is sometimes said that a power to add beneficiaries is to cater for unforeseen circumstances. However if the power can only be exercised to promote the interests of current beneficiaries, that will narrow the circumstances in which it can be used.
  2. Other trustee powers must equally not be exercised for an improper purpose e.g. a power of appointment, or a power of investment.
  3. How does one decide the purpose of a power? According to the Privy Council, the purpose is decided based on the contemporaneous evidence from when the settlement was made. However, that evidence will dissipate over the years due, for example, to document retention policies. The purpose that can be proved may change over time depending on available evidence.
  4. Typically a trust deed would not contain a statement of the purpose of a power. In future, it may be appropriate to include in a power a statement as to its purpose, in case at a future point the only evidence as to the purpose of the power is the trust deed.
  5. A letter of wishes may contain a statement of the purpose of a power. But it seems only a letter of wishes contemporaneous with the trust deed can be taken into account in this regard. A subsequent letter of wishes cannot (though would remain a relevant consideration in other contexts).

Outgoing trustee’s protection against liabilities – Equity Trust (Jersey) Ltd (Respondent) v Halabi [2022] UKPC 36

This was a decision of the Privy Council in joined Jersey/Guernsey appeals. Successive trustees had incurred trust liabilities, and the trust assets were insufficient to pay all the trust liabilities (i.e. the trust was “insolvent”). The question was which trustee had priority for payment of its liabilities.

The Privy Council decided:

a. the trustee right of indemnity from the trust assets confers on the trustee a proprietary (rather than merely possessory) interest in the trust assets;

b. the proprietary interest of a trustee survives the transfer of the trust assets to a successor trustee;

c. the successive trustees’ interests in the trust assets rank equally (not first in time) where those assets are insufficient to meet all the liabilities payable from them.

There are a number of practical points from this:

  1. On a change of trustees, an outgoing trustee will wish to consider its position in relation to pre-existing trust liabilities. The new trustee might incur liabilities which leave insufficient assets to meet the pre-existing liabilities.
  2. An outgoing trustee might wish to keep a retention or obtain express security or indemnities against pre-existing liabilities. There is, however, authority in other jurisdictions that an outgoing trustee is not entitled to insist on contractual indemnities or a retention. In Simcocks’ view an outgoing trustee is, notwithstanding these authorities, entitled to reasonable protection and, if the parties cannot agree what that protection should be, the court can give directions. 
  3. Where a trustee contracts with a third party, the trustee may wish a contractual provision limiting its liability to the trust assets. A third party might be more cautious about agreeing this, if a later trustee can incur liabilities payable from the trust assets which reduce the trust assets available for the third party if it should make a claim.
  4. The Federal Court of Australia has since declined to follow the Privy Council and applied a “first in time” principle (Fotios (Bankrupt) v Helios Corporation (No 3) [2023] FCA 251). But the Privy Council is the Isle of Man final court of appeal and the Isle of Man courts are very likely to follow its decision in Equity Trust.  

Directors’ duty in relation to creditors – BTI 2014 LLC v Sequana SA and Others [2022] UKSC 25

This was a decision of the UK Supreme Court. In 2009 the directors of an English company called AWA paid a dividend of €135 million. AWA was at the time solvent on both a balance sheet and cash flow basis, but had long-term pollution related contingent liabilities of uncertain amount and insurance of uncertain value. There was a real risk that AWA might become insolvent at some stage in future, though insolvency was neither imminent nor probable.

AWA went into insolvent administration in 2018, and the directors were sued to recover the dividend on the basis that the decision to pay the dividend was in breach of a duty of company directors to consider the interests of the company’s creditors.

A duty to consider the interests of creditors in an insolvency situation had been recognised in previous cases (e.g. the English Court of Appeal in West Mercia v Dodd [1988] BCLC 250), but this was the first consideration by the UK Supreme Court.

The Supreme Court decided that:

a. in certain circumstances (see below), a director’s duty to act in the interests of the company is modified by the common law rule that the company’s interests are taken to include the interests of the company’s creditors as a whole (the “creditor duty”);

b. where the company is insolvent, or bordering on insolvency, but is not faced with an inevitable insolvent liquidation or administration, the directors should consider the interests of creditors, balancing them against the interests of shareholders where they may conflict. The greater the company’s financial difficulties, the more the directors should prioritise the interests of creditors;

c. the creditor duty was not engaged on the facts of this case because, at the time of the May 2009 dividend, AWA was not actually or imminently insolvent, nor was insolvency probable. The creditor duty does not apply merely because the company was at a real and not remote risk of insolvency;

d. the creditor duty is engaged when the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable.

There are a number of practical points from this:

  1. The Companies Acts 1931 – 2004 contain no rules as regards the lawfulness of dividends. Common law rules apply. The Supreme Court decision in Sequana will in Simcocks’ view certainly be followed by the Isle of Man courts in the case of a 1931 Act company.
  2. In that context, when making decisions, directors must consider whether the creditor duty is engaged. Legal advice may be required, including as to documenting board consideration of its duties and decision making.
  3. If the creditor duty is engaged, directors should consider what is in the interests of creditors as a whole.
  4. In the case of a company incorporated under the Companies Act 2006, distributions (which includes dividends) are subject to a statutory solvency test, with clawback from shareholders and recovery from directors in certain circumstances. This statutory framework appears to displace the common law creditor duty in the context of distributions by a 2006 Act company.
  5. But the common law creditor duty would apply to other transactions by a 2006 Act company, for example a decision by the directors to continue trading where there are solvency issues.

Contact Kevin O’Loughlin if you would like to discuss any of these points.

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