Beneficiaries apply for beddoes relief – in the matter of the X Trust [2012] JRC 17

Beneficiaries apply for beddoes relief – in the matter of the X Trust [2012] JRC 17

This case involved an application to the Royal Court of Jersey for beddoes relief by beneficiaries of a trust, so that they could pursue breach of trust claims against the incumbent trustee at the expense of the trust fund and without personal costs exposure.

Although the English Court of Appeal has decided that discretionary beneficiaries shouldn't ordinarily be given beddoes relief, the Royal Court concluded that in appropriate circumstances beneficiaries should have beddoes protection, where they are in effect suing in a derivative capacity for the benefit of the trust fund.

The underlying claim

The trust fund had suffered very substantial losses due to alleged breaches of trust by the trustee. The claimant beneficiaries' investigations into the claim against the trustee were initially funded by distributions.

However, the trustee (whilst acknowledging that it was conflicted) subsequently took the view that there was a potential prejudice to the trust from the maintenance of the proceedings against it and refused to continue making any further payments towards litigation costs absent a court order.

The applicable law

The Court was satisfied that Article 51(3) of the Trusts (Jersey) Law 1984 gave it jurisdiction to order distributions be made to the beneficiaries assuming the payments were for the benefit of the trust, and the court said that if that were the only option available, it would have made such an order.

However, the court also concluded that it had an inherent jurisdiction to make a beddoes order in favour of the beneficiaries because they were in effect bringing the claim as trustees for the benefit of the trust.

The English position

The Court referred to the principle in the English decision of Wallersteiner -v- Moir, in effect exporting the beddoes jurisdiction to derivative actions brought under the exception to the rule in Foss -v- Harbottle which principle was extended in McDonald v Horn to derivative action cases brought by beneficiaries on behalf of a trust.

MacDonald -v- Horn concerned a pension scheme where a group of members took action against the trustees. The claimants applied for a pre-emptive cost order requiring that their costs and any costs that they would have to pay to the defendant, should win or lose, be paid on an indemnity basis out of the pension fund. The application succeeded at first instance and the decision of the High Court was upheld in the Court of Appeal.

Prior to McDonald -v- Horn, beneficiary claimants with hostile claims against trustees would normally have been treated as ordinary litigants, where costs follow the event but in that case Hoffman LJ extended the beddoes jurisdiction on two bases: first, the pension scheme members were in essence bringing a derivative action, seeking restitution of the entire fund in which they had only a limited interest, and second because (by reason of their employment and usually having made pension contributions) they had rights arising out of their commercial relationship with the trust, which rights entitled them to be satisfied the trust was being properly administered.

Hoffman LJ was careful not to extend the principle to typical discretionary beneficiaries who have not contributed, but simply enjoy the "settlor's bounty" as, he said, their position is not so analogous to shareholders suing in a derivative capacity.

The principles of McDonald -v- Horn have not been extended in any published English judgments to beneficiaries of ordinary discretionary trusts.

The Jersey position

The Jersey court took careful consideration of the decision in McDonald -v- Horn and the possibility of beneficiaries all too easily litigating at the expense of the trust.

However, the court then considered the principles arising from the Privy Council decision in Schmidt -v- Rosewood and in particular the right of a beneficiary to seek protection from a court of equity and that court's inherent jurisdiction to supervise the administration of a trust, balancing competing interests of different beneficiaries as necessary.

The court concluded there was no reason why its inherent supervisory jurisdiction should not extend to making a beddoes order in favour of discretionary beneficiaries, so long as the court considered that such an order was in the interests of the trust and thus the beneficiaries as a whole. Whilst the existence of a contractual nexus (such as existed in McDonald) may add weight to the arguments in favour of such an order, the absence of such a nexus does not imply the beneficiary has no right to the proper administration of the trust.

Application of the Jersey position to the facts

The court reviewed the following factors:

1.         The trustee was defending itself, and not the trust, so that the beneficiaries were in effect standing in the shoes of the trustees and the trustees were in effect a third party. This brought the action out of the Alsop Wilkinson -v- Neary.

2.         The dispute was akin to derivative proceedings, even though as principal beneficiaries the claimants were likely to see some benefit if the main litigation is successful.

3.         English leading counsel had provided two opinions from which it was clear that in counsel's view the claims were not fanciful and were well-founded in principle.

4.         If the beddoes order was not made, there was a real possibility of the claim having to be discontinued through lack of funding which, in the context of leading counsel's opinions, would not be in the interests of the beneficiaries as a whole.

5.         The interests of the other beneficiaries were unlikely to be substantially adversely affected if the litigation was lost, in that some of them typically received small annual stipendiary amounts (which could continue to be paid come what may) whilst others (who had interests in a parallel trust) had no immediate probability of benefit unless and until the X Trust outperformed the other parallel trust.

Taking all of these factors into account, the court concluded that it was in the interests of the trust for the beddoes relief to be granted.

Comment

Although the hearing of this matter was in private, the judgment was published (in anonymised format) because the jurisdiction to make these orders has not previously been considered by the Royal Court in a published judgment.

In the author's view the judgment demonstrates the willingness of the Jersey judiciary to give due weight to the body of English trust law whilst being prepared to use the court's supervisory jurisdiction to strike out in a slightly different direction where, in their view, the interest of the trust merit it.

This case could significantly increase the ability of beneficiaries to hold trustees to account for wrongdoing. In order for beneficiaries of discretionary trusts to obtain beddoes relief they are likely to have to show that any damages awarded in the proceedings are for the benefit of the trust (such that the proceedings are in reality a form of derivative proceedings), that the usual beddoes test is met and that they are not "opening the floodgates" to excessive beneficiary litigation at the expense of the trust.

Ogier acted for the beneficiaries in the application.

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