Trusts, self-dealing and conflicts – Bedell Cristin acts for successful beneficiary

Advocate Robert Christie of Bedell Cristin, acting for a beneficiary, has successfully resisted a Jersey trustee's attempt to make cheap loans to a related trust of which it was also trustee. Indeed, the Jersey Court found the trustee's conflict to be so pervasive it was directed to resign.

In the recent case of Representation of V Trustees Limited re K and N Trusts [2020] JRC 220, the Royal Court considered the common situation where a trustee is trustee of two related family trusts with inter-trust loans or other obligations. The trusts had originally been a single trust, but had been separated for tax purposes over 20 years ago, with a hope expressed by the settlor that they might effectively be rejoined at a later date.

Significant sums of money had been loaned from one trust (the Lending Trust) to the other (the Borrowing Trust), in part because the Lending Trust had performed considerably better than the Borrowing Trust over the years since the trusts were separated. At the time of the separation of the trusts, the assets of the Borrowing Trust were twice as valuable as the assets of the Lending Trust, because the Borrowing Trust had two sibling beneficiaries and the Lending Trust only one. Over the years since the trusts were separated, the differing performance of the trusts had reversed that position to the detriment of the beneficiaries of the Borrowing Trust.

The Representation was brought by the trustee of both trusts, to determine whether it could "rebalance" the trusts in favour of the Borrowing Trust; or failing that, continue to lend from the Lending Trust to the Borrowing Trust for a significant period, to allow the Borrowing Trust to dispose of certain assets at a point in the future more advantageous to its beneficiaries.

The position was complicated by the fact that the two beneficiaries of the Borrowing Trust were irrevocably excluded from the Lending Trust.

The trusts were governed by Bermudan law but administered in Jersey. The Royal Court accepted jurisdiction and had the benefit of extensive expert evidence of Bermudan law. The Royal Court accepted this expert evidence and found it was consistent with the position at Jersey law.

The Royal Court held that:

1. the trusts had been separated as a matter of law and could not be "rebalanced", as the trustee must act, in relation to each trust, in the interests of its beneficiaries;
2. because of the self-dealing rule, any loan (or other) transaction between the trusts required either the consent of the beneficiaries of each trust, or the blessing of the Court;
3. in order to bless any proposed further loan transaction, the Court would need to be satisfied that it was in the best interests of the beneficiary of the Lending Trust;
4. because of the Excluded Persons provisions, the Court would also need to be satisfied that the proposed loan transaction was on arms-length terms equivalent to those commercially available to the Borrowing Trust, so its beneficiaries would not benefit from the Lending Trust as a result of the transaction; and
5. in relation to the only area of dispute on the expert evidence, the Royal Court rejected the suggestion that the well-known Section 47 of the Bermuda Trustee Act 1975 could be used to rebalance the trusts, since doing so would not be "expedient" from the point of view of the Lending Trust (which is the threshold requirement for the use of Section 47).

The beneficiary of the Lending Trust submitted that the proposed further loan transaction was not in his interests and was not on commercial terms, such that the test in both points 3 and 4 above was not satisfied; and further, that the trustee was no longer able to effectively manage its conflict and should resign as trustee of the Lending Trust.

The Court agreed with this submission, declined to approve any transaction, and directed the trustee to resign as trustee of the Lending Trust, and to appoint a successor trustee of the beneficiary's choosing.

The decision is a reminder to trustees of more than one related trust, where there are transactions between the trusts, to tread carefully in relation to their potential conflict and fully consider the effect of the self-dealing rule and any excluded person provisions.

The judgment can be found here