Do the objects of a mere power have the rights to sue their trustees?

Sarah Daile Freeman and others -v- Ansbacher Trustees (Jersey) Limited [2009] JRC003Facts and Decision

Facts: 

This judgment arose out of an application by Ansbacher Trustees (Jersey) Limited (the “Trustee”) to strike out a claim made by Sarah Daile Freeman (“Sarah”), Robert Keith Freeman (“Robert”) and Rosanna Freeman (“Rosanna”, and together the “Beneficiaries”) for damages arising from breach of trust.

The JB Sims No.1 Jersey Settlement (the “Trust”) was a standard discretionary trust which had been established under Jersey law on 4 May 1978. The Trustee was the original sole trustee of the Trust from its inception up until 14 August 1998 when a number of individuals including Kenneth George Freeman (“Mr Freeman”) and his wife Pauline Ann Freeman (“Mrs Freeman”) were appointed to act as co-trustees with the Trustee (Mr Freeman being the father of the Beneficiaries and the most significant settlor of assets into the Trust). Subsequently, the Trustee resigned from office as a co-trustee of the Trust on 1 March 2000.

At all material times the sole significant asset of the Trust was the whole of the issued share capital of a Jersey company called S.D. & R. Trading Limited (“SDR”) which in turn held a number of underlying assets.

On 14 December 2007 the Beneficiaries together issued an order of justice making a number of specific allegations of breach of trust against the Trustee relating to losses sustained in respect of a land transaction, a software deal and a tax claim. The Trustee responded by attempting to have the claim struck out without a substantive hearing on a number of grounds including prescription, the ability of the Trustee to rely on the exculpation provisions contained in the Trust documentation and the rule against the recovery of reflective loss. For the purposes of this note, however, the relevant ground upon which the Trustee sought to have the claims abandoned was that the Beneficiaries had no locus standi to sue the Trustee - i.e. that their status as potential recipients of benefit under the Trust did not constitute an interest sufficient enough to allow them to bring the claim.

Submissions

The Trustee contended that the Trust could be analysed as including the following elements:
(i) a trust to accumulate income;

(ii) a mere power to appoint capital and/or income to the Beneficiaries during the trust period; and

(iii) a default trust to take effect at the end of the trust period to hold the Trust’s assets in equal shares for the members of the beneficial class living at that time.

The Trustee contended (relying, inter alia, on the decision of the English High Court in Re Manisty’s Settlement Trusts [1974] Ch 17) that there was a fundamental distinction between on the one hand the remedies available to individuals who were discretionary objects of a trust (i.e. where a settlement contains a trust to appoint capital and/or income together with a mere power to accumulate income) and on the other hand to individuals (as in the present case) who are simply discretionary objects of a mere power. The former class of individuals were entitled to seek the restitution of loss to a trust fund from a trustee who had committed a breach of trust, whereas the only remedy available to the second class of individuals (which included the position of the Beneficiaries) was to ask the Court to remove trustees who refused to consider exercising that mere power in their favour and to replace them with new trustees who would properly consider the exercise of that power. The Beneficiaries, however, contended that in the light of more recent decisions (notably Schmidt -v- Rosewood (2003) All ER 76) the distinction between the rights to particular remedies of objects of trusts and objects of mere powers was no longer absolute but was rather a matter for the discretion of the Court to be made on a case by case basis.

Decision

Agreeing with the Beneficiaries on this point, the Court had no hesitation in holding that objects of a mere power were entitled to ask a court for the restitution of losses to a trust fund (or, for that matter, for any other equitable remedy which might be available to objects of a trust). The Court made it cleat that, in its view, the decision in Schmidt had superseded the earlier decision in Manisty and that there was no good reason to draw a “bright dividing line” between the nature of the contingent interest in trust assets of the discretionary objects of a trust and those of the discretionary objects of a mere power. The Court accordingly declined to strike out the claim on the basis that the Beneficiaries lacked locus standi to bring the action.

Comment 

Whilst (for reasons of prescription) the claim of both Sarah and Robert was actually struck out by the Court, the claim of Rosanna was allowed to proceed. As well as providing a definitive and helpful clarification of the rights of the objects of mere powers to bring claims against trustees, this judgment also points the way towards the Court examining certain other issues of direct concern to trustees if Rosanna’s claim eventually comes to trial. The most significant of these will be the degree to which the rule against the recovery of reflective loss should be applied to cases where the losses concerned have been suffered by a company that is wholly owned by a trust. Given the prevalence of this type of structure within the local trust industry professional trustees will wish to pay very close attention to the way in which this case develops.

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