Asset Protection

The Nature of Protectors’ Powers


By Naomi O’Higgins, a solicitor in the Contentious Trusts Group of the Tax and Private Capital Department of Lawrence Graham LLP (Solicitors), www.lg-legal.com (01/11/2009)

The extent and nature of the protector role will vary greatly from trust to trust. However, one key role which all protectors will have in common is to act as a third party supervisor of the chosen trustee.

The identity of the person chosen to be the protector can vary from a close family member to a trusted professional adviser. Where close family or friends act as protector, they can provide a useful link between the trustee and the beneficiaries and the settlor. However, this can sometimes give rise to potential conflicts of interest, particularly where the protector is also a settlor or beneficiary of the trust or has a financial interest in the trust fund. This scenario arose in two recent cases decided by the Royal Court in Jersey - Re Centre Trustees (CI) Limited and Langtry Trust Company (Channel Islands) Limited and in the matter of the VR Family Trust [2009] JRC 109 and The Representation of DG, AN and TTL and TT Limited [2009] JRC 140, which I will discuss in further detail below.

Are the protector’s powers fiduciary or personal?

Generally speaking, protector powers are usually considered to be fiduciary in nature. This will mean that the protector is bound to exercise their powers for the benefit of the beneficiaries. Such powers are to be exercised in good faith and in accordance with the purposes for which they were granted by the settlor. The protector will need to consider actively the exercise of such powers1 and in doing so will need to give consideration only to relevant matters2.

Crucially, the protector cannot exercise his powers for his own benefit.

Occasionally, however, the settlor’s intention may be to grant the protector personal powers. Where personal powers are granted, the protector can act entirely in their own interests without any duties being owed to beneficiaries or other third parties.

The extent and nature of a protector’s duties has been the subject of the consideration of the courts in a number of jurisdictions. In general, the courts will look at the trust document as a whole in order to determine the intention and purposes of the settlor in granting those specific powers to the protector at the time that the trust was established. The court will also look at evidence of the settlor’s intention based on contemporaneous evidence at the time the trust was created, for example, in a letter of wishes.

In examining the evidence, the following may be indicative of whether the protector’s powers are personal or fiduciary:

Fiduciary:

o   powers are expressed in terms of an office with appropriate succession provisions rather than being granted to specific individuals;

o   the protector is independent – this could be evidenced by the fact that they are a paid professional and/or benefits from exculpation clauses;

o   the protector’s powers are mainly reactive; and

o   the powers are expressed to be fiduciary in the deed.

Personal:

o   clear evidence of the settlor’s intention that the powers are intended to be personal or none of the above indicators are present;

o   the protector has significant proactive powers;

o   the protector is a beneficiary and/or settlor;

o   the role is not expressed in terms of an office; and

o   the powers are expressed to be personal in the deed.

 

On a practical level, whether the duties of the protector are personal or fiduciary will determine whether the protector can come within the control and scrutiny of the court and whether the court could exercise its inherent jurisdiction.

This was explored by the Royal Court in the Centre Trustees judgement. The facts of the case were that Mr Pabst was the protector and appointor of the VR Family Trust which had been settled by a Mr Van Rooyen. Mr Pabst was also the settlor of a trust called the Africa Trust. The trustees of the VR Family Trust and the Africa Trust entered into a joint venture to develop mines in South Africa via a company called Terret Limited. Centre was the trustee of the VR Family Trust. In 2000, Mr Van Rooyen and his wife were killed in a helicopter accident leaving two minor children.

In the summer of 2004, Centre received an offer from Mr Pabst on behalf of the Africa Trust to purchase its shareholding in Terret Limited for a nominal amount. Centre became concerned that the Africa Trust was receiving greater benefits out of the company than the VR Family Trust.

In 2007, Mr Pabst used his powers under the VR Family Trust to appoint Langtry Trust Company (Channel Islands) Limited as co‑trustee with Centre. Centre was concerned that this was done without proper communication to the beneficiaries. Both Centre and Langtry were concerned that Mr Pabst was exercising his powers for his own benefit and that he had a conflict of interest. As a result, they made an application to the Royal Court in Jersey.

The Royal Court examined the nature of Mr Pabst’s powers as protector and appointor under the VR Family Trust. The trust deed contained a clause which provided that no power vested in the protector was a fiduciary power. However, in the judgment it was held that the power to appoint new trustees is a fiduciary power which cannot be exercised for the protector’s own benefit.

In the judgement, the Royal Court considered a three fold division of dispositive and administrative powers. The classifications were expressed as follows:  

o   beneficial powers – these can be exercised in any way for the benefit or purposes of the donee, as the donee wishes without restriction. Professor Hayton discussed these in Underhill and Hayton Law of Trusts and Trustees (17th edition, paragraph 1.76, p48). Professor Hayton describes beneficial powers as being those granted to a protector where the intention of the settlor “is to confer full dominion over the relevant property on the donee or full power to withhold consent to particular courses of action so as to enable the donee to protect his own interests, so that the donee can act selfishly as he wishes purely to benefit himself”. In that case, the fraud on the power doctrine will not apply (and clearly the protector will therefore be wholly outside the jurisdiction of the court).

o   limited powers – these must be exercised in good faith for the purposes for which they are given. They differ from beneficial powers in that they are conferred for the benefit of one or more of the beneficiaries other than the donee. These are described as non‑beneficial powers by Professor Hayton. He says that the donee of such power is intended to be wholly unaccountable in respect of the power’s exercise or non‑exercise, so long as upon any exercise of the power, only the objects of the power are to benefit so that it will be a fraud upon the power if the donee exercises it to benefit persons who are not objects of the power (such as the donee himself).

o   fiduciary powers – these are classed as limited powers. The donee of a fiduciary power owes a duty to the objects of power to consider from time to time whether and how to exercise it and they have various remedies open to them if the donee does not or cannot do so. He is not bound to exercise such a power merely by virtue of it being a fiduciary power, the duty being to consider its exercise, although in the case of what is called a trust power, he is bound to exercise it.

 

The Court in this case held that, using this classification, the protector’s powers would appear at least to be limited powers conferred for the benefit of one or more of the beneficiaries other than the protector. The clause which expressly stated that the protector’s powers are not held in a fiduciary capacity would simply mean that they  are not under an obligation to consider from time to time whether or not to exercise them. If they are exercised, then the exercise has to be considered to be for the benefit of one or more of the beneficiaries. This is a different approach from that followed by the courts in the Isle of Man in Re Papadimitriou.

It was agreed that, irrespective of whether the powers are fiduciary or personal, the beneficiaries of the VR Family Trust would be entitled to require that decisions made by their protector and appointor are made independently of any private and competing duty.

The Representation of DG case primarily involved the consideration of whether assisting a beneficiary with the partial discharge of a debt would be for the benefit of that beneficiary. However, the nature of protector powers was also considered.

That case involved a Jersey discretionary settlement, settled by WM, the beneficiaries of which also included the settlor himself, his spouse and three children.

WM was in poor health, alcohol dependent and in a large amount of debt. In November 2008, he made a request to the Representors to appoint the whole of the trust fund to him to discharge his debts. The Representors refused to do so on the basis that the distribution would not fully discharge the debt and therefore, the settlor would still be made bankrupt. Therefore, the distribution would not only fail to provide an adequate level of benefit to WM but it would also be to the detriment of the trust fund and so not in the benefit of the other beneficiaries either. There were also doubts raised as to whether the money would actually be used for its intended purpose of discharging WM's debts.

Having first tried to appoint family members to act as additional trustees, WM exercised his powers as protector of the trust to remove the Representors as trustees and appointed a family friend, DD, in their place. The custody of the trust assets remained with the Representors. All parties agreed that the trust fund was too small to justify the costs of administration and therefore that the trust should be terminated. The Representors, in their capacity of bare trustees of the trust fund, sought a declaration as to where the trust fund should be appointed.

The Royal Court considered the judgement in Re the Esteem Settlement [2001] JLR 7, where the Royal Court held that a mere reduction of a debt is not of itself a benefit simply because it results in the debtor owing less money than before, and gave directions that the small amount remaining in the trust should be distributed to the children of WM.

The Court considered the WM’s exercise of his protector’s powers in the appointment of DD and it was stated that: "the circumstances in which WM appointed DD as trustee raise some considerable doubt as to whether he was acting in accordance with his fiduciary duties and accordingly the appointment was susceptible to being set aside as a fraud on the power." However, given the limited resources contained within the trust fund, the Royal Court was urged to take a pragmatic approach and so did not consider this in detail. There was nothing within the settlement deed which indicated that the powers vested in the protector were personal. As a result, when exercising these powers, the protector would be acting in a fiduciary capacity. Here he had a clear conflict of interests. The settlement deed required the protector's consent to make an appointment to the children. The Court decided to suspend the powers of the protector so that the deed would be read as if references to the protector be omitted.

Nevertheless, a conflict of interests may not always prove fatal. Interestingly, in the Centre Trustees decision, the Royal Court said that, although in the instant case the protector's abuse of his powers were so egregious, a conflict of interest is not necessarily a bar to a protector continuing to hold office.

It set out a list of guidelines which should be followed:

 a.              when the conflict first comes to light, the protector should disclose the same to the trustee and to the beneficiaries;

b.             how a conflict should be managed will depend on the protector’s powers and the nature of the conflict. The protector may be able to remain in office if it is in the interests of the beneficiaries for him to do so and if he honestly and reasonably believes he can discharge his duties in the interests of the beneficiaries; and

c.              if not, the protector must resign and if he fails to do so, it is the duty of the trustee to apply to the court for his removal.

 

 

In conclusion, the Royal Court has shown that it will take a practical approach in interpreting the nature of a protector’s powers and duties. However, such questions of construction and perhaps more serious actions impugning the validity of the trust can be avoided by being clear within the terms of the trust deed itself and avoiding granting significant personal powers where possible.

 


 

1 In the Isle of Man case of Re Papadimitriou [2004] WTLR 1141, the court held that the duty did not apply in relation to the power to appoint trustees.

2 The question of whether a protector power was properly exercised was considered in the Bermuda case of Von Knierem v Bermuda Trust Co Ltd 1994 Nos 154 and 162 unrep. The court held that a power was properly exercised so long as it was  neither for the protector’s own personal benefit nor a corrupt purpose.