In re F (unreported) 21/06/13

In re F (unreported) 21/06/13

In re F concerned a Jersey trust administered in Guernsey (the Trust).  This judgment deals with the in camera element of a complicated piece of litigation involving a complex trust structure with a substantial portfolio of investments.  The parties to the litigation included the trustees of the Trust (the Current Trustee), the Protector, the former trustees of the Trust (the Former Trustees) and a potential creditor of the Trust (the Appellants).  The main litigation concerned various debts which the Appellants, a group of insolvent companies acting through their joint liquidators alleged were owed by the Former Trustees in their capacity as trustee of the Trust and personally.  After the dispute commenced and the Former Trustees were replaced as trustee by the Current Trustee, the Former Trustees had claimed a lien over the trust property to protect their position until the main litigation was decided.  This meant that they still held the trust property, therefore had to be involved in the decision-making process, despite the fact that the Current Trustees had been appointed in their place.

Facts

The appeal in this case was in relation to an application by the Former Trustees who sought directions as to the refinancing of a loan secured on a substantial property in London which was an asset of the Trust.  The Former Trustees applied for directions in a Public Trustee v Cooper-style application on whether they should investigate refinancing, and as to whether the costs could be paid out of the Trust property.  This was because the bank holding the mortgage had indicated that they were not prepared to grant further extensions to the facility, and whilst an alternative lender was found, the cost of the refinance was approximately £720,000.  Neither the company owning the building nor its parent company were insolvent, however, nether could meet the costs of the refinancing either.  The Former Trustee's Application was supported by both the Current Trustee and the Protector, and opposed by the Appellants.

Judgment

The Court of Appeal provided some helpful and interesting guidance in relation to the categories of trustee application set out in Public Trustee v Cooper, and in particular, some useful distinctions between categories 2 and 3, as set out in the judgment of Martin, JA:

"Such applications may be of four main types, of which the first and fourth are applications to determine the scope of a duty or power, and applications (whether by trustees or beneficiaries) to determine whether a duty has been properly discharged or a power properly exercised. It is the second and third types which are of relevance to the present appeal. The second type, sometimes known as a category 2 application (following the classification set out in Public Trustee v Cooper [2001] WTLR 901), is an application by trustees for the "blessing" by the court of a “momentous” decision which the trustees are proposing to make. The third type of application is one where the trustees are unable to decide how to exercise a power – perhaps because of conflict of interest, or because the trustees are genuinely deadlocked. The primary difference between the second and third types is that in the second type the trustees intend to exercise their own discretion, whereas in the third type the trustees want the court to exercise the discretion for them (and therefore surrender their discretion to the court). Although it is not always immediately apparent whether a given application is of the second or the third type (because, for example, trustees ask for directions whether or not they should pursue some course of action), it is important to note that the function of the court in each of the second and third types of application is entirely different."

At first instance, the refinancing had been authorised.  The Appellant's application for leave to appeal was refused by the judge at first instance, but the Court of Appeal (C of A) took the view that owing to the fact that the application was a category 2 type application, the order made in respect of it was a final declaration meaning leave to appeal was not required.

Further clarification was provided in relation to category 2 style applications in that the C of A stated that the effect of a category 2 application was to "protect the trustees from any challenge to their decision" and "make clear that the trustees are entitles to indemnity form the trust assets in respect of the costs or orther financial consequences of their decision".  It did not matter that the Court might have exercised its discretion in a different way to the way in which the Trustees decided to exercise theirs.

Further guidance was also given by the Court in relation to the factors which would need to be considered when appealing a decision in relation to a category 2 type application.  It was held to not be necessary for the Appellant to "satisfy the well established criteria by which a discretionary decision of a judge may be attached at appellate level" but acknowledged that the test was similar in that they needed to show that the judge was wrong to hold that the trustee (in this case the Former Trustees) were acting honestly and within the ambit of the power, or that the judge had been wrong to hold that the trustee had taken into account all relevant considerations, disregarded any irrelevant considerations, and reached a decision that reasonable trustees could have reached.

Helpful guidance was also provided in relation to dealing with an insolvent trust, or, as in this case, a trust which is potentially insolvent if the creditor's claims were successful.  It must be borne in mind that a potential (unsecured) judgment creditor has no direct interest in the trust or its assets, and that just because the trust is insolvent does not mean that the trustee loses its power to deal with the trust property.  However, the trustee can clearly not act improperly as against creditors to try to protect the trust assets, and nor could the Court give its blessing to such actions.  In the words of Martin, JA, "it is the court's task to consider the matter with regard to the interests of all those who have or may have an interest in the trust property".

Lastly, this case also provided assistance to parties seeking to apply to vary the length of time in which a party can make an appeal.  The C of A held that the Court of Appeal has the power under rules 3 and 17 of the Court of Appeal (Civil Division) (Guernsey) Rules 1964 to extend or abridge the length of time in which a party can make an appeal.

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