Applications by Trustees for the Court’s “Opinion, Advice or Direction”

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Applications by Trustees for the Court’s “Opinion, Advice or Direction”

By N. Leroy Smith


“You have brains in your head. You have feet in your shoes. You can steer yourself in any direction you choose. You're on your own, and you know what you know. And you are the guy who'll decide where to go.”
- Dr. Seuss, Oh The Places You’ll Go


Introduction


It seems quite unlikely that while penning the words quoted above, the preeminent children’s book author could have had in mind the office of trustee, which role has been variously described as “onerous” and “…attended with no small degree of trouble and anxiety…”


While they are (usually, but) not always the one who must ‘decide where to go’, in the eyes of the law, trustees are not ‘on their own’.


By reason of the special position occupied by trustees, the Courts of Equity have for a very long time recognized the right of trustees to approach the court for directions.


Under the laws of The Bahamas, (aside from general equitable principles) express provision is made (in statute and subsidiary legislation) for trustees to apply to the court for guidance in the administration of trusts under (i) Order 74 the Rules of the Supreme Court or (b) Section 77 of the Trustee Act 1998 (“Section 77”). 


This article will provide a brief overview of the Court’s jurisdiction under Section 77 considering recent jurisprudence potentially affecting/informing the same.


General


Section 77 of the Trustee Act appears to have been derived in significant part from Section 30 of the Law of Property and Trustees Relief Amendment Act (also known as “Lord St. Leonards Act") which was enacted by the English Parliament in 1859.


Section 77 provides that:

    (1)     

 A trustee or personal representative may without commencing an action apply upon a written statement for the opinion, advice or direction of the Court of Judge in Chambers on any question respecting the management or administration of the trust property or the assets of any testator or intestate.

 

 
      (2)    

Such application shall be served upon and the hearing attended by all persons interested in such application or such of them as the Judge thinks expedient.

 

 
      (3)    

A trustee or personal representative acting upon the opinion, advice or direction given by the Judge shall be deemed so far as regards his own responsibility to have discharged his duty as such trustee or personal representative in the subject matter of the said application.

 

 
      (4)    

Subsection (3) shall not extend to indemnify any trustee or personal representative in respect of any act done in accordance with such opinion, advice or direction if he is guilty of any fraud or wilful concealment or misrepresentation in obtaining such opinion, advice or direction.

 

 
      (5)     The costs of such application shall be in the discretion of the Judge."  

 

[Emphasis added]


When will it be appropriate to apply for directions?


In the leading English case of Public Trustee v Cooper [2001] W.T.L.R. 901 (Ch D), Mr. Justice Hart (sitting in the Chancery Division of the English High Court) quoted from a judgment of Robert Walker J in an unnamed 1995 case which wherein Walker J. stated that:

 

      “At the risk of covering a lot of familiar ground and stating the obvious, it seems to me that, when the court has to adjudicate on a course of action proposed or actually taken by trustees, there are at least four distinct situations (and there are no doubt numerous variations of those as well).     

 

 

      (1)    

The first category is where the issue is whether some proposed action is within the trustees' powers.

 

 
      (2)    

The second category is where the issue is whether the proposed course of action is a proper exercise of the trustees' powers where there is no real doubt as to the nature of the trustees' powers and the trustees have decided how they want to exercise them but, because the decision is particularly momentous, the trustees wish to obtain the blessing of the court for the action on which they have resolved and which is within their powers. Obvious examples of that, which are very familiar in the Chancery Division, are a decision by trustees to sell a family estate or to sell a controlling holding in a family company.

 

 
      (3)    

The third category is that of surrender of discretion properly so called. There the court will only accept a surrender of discretion for a good reason, the most obvious good reasons being either that the trustees are deadlocked (but honestly deadlocked, so that the question cannot be resolved by removing one trustee rather than another) or because the trustees are disabled as a result of a conflict of interest.

 

 
      (4)    

The fourth category is where trustees have actually taken action, and that action is attacked as being either outside their powers or an improper exercise of their powers. Cases of that sort are hostile litigation to be heard and decided in open court.” 

 


In the same year, i.e.
circa 2001, the Grand Court of the Cayman Islands held that general issues of construction arising in respect of a trust document which were not factually contentious could also be determined under Section 48 of the Trusts Law (2001 Revision) (which is materially identical to The Bahamas’ Section 77) despite the fact that it referred only to “management or administration”.   (In the Matter of the Q Trusts [2001] CILR 481)


‘Surrender ‘vs ‘non-surrender’


The Public Trustee v Cooper decision reflects that a distinction exists  between (i) cases where trustees seek the approval by the court of a proposed exercise by them of their discretion (i.e. ‘the Court’s blessing’) and (ii) cases where they surrender their discretion to the court.


In cases where there is a surrender, the court starts with a clean sheet and has an unfettered discretion to decide what it considers should be done in the best interests of the trust.


In cases where there is no surrender, “The court’s function …is a limited one. It is concerned to see that the proposed exercise of the trustees’ powers is lawful and within the power and does not infringe the trustees’ duty to act as ordinary, reasonable and prudent trustees might act, ignoring irrelevant, improper or irrational factors; but it requires only to be satisfied that the trustees can properly form the view that the proposed transaction is for the benefit of beneficiaries or the trust estate and that they have in fact formed that view. … [O]nce it appears that the proposed exercise is within the terms of the power, the court is concerned with limits of rationality and honesty; it does not withhold approval merely because it would not itself have exercised the power in the way proposed.”1


[Note: Based upon the reported authorities, cases falling into the ‘surrender of discretion’ category are relatively rare.  Instead, the preponderance of applications entail the trustee seeking the court’s approval proposed courses of action.]


Key Principles underpinning Trustee Directions Applications


No matter what type of application is being brought, the following essential principles will apply:

 

 

1)     

The Trustee should take proper advice and ensure that it has done its homework 

 

 
     

By way of illustration reference is made to the decision of the Supreme Court of New South Wales in Re Appln of NSW Trustee & Guardian – BC201402504 in which it was stated that:

 

 
     

 “In applying to the court for judicial advice, the trustee is not abrogating or delegating its obligation to apply its own judgment in deciding whether to do (or not do) something in execution of the trust. The trustee must actively and honestly bring its mind to bear on any particular problem confronting it. Where necessary, it is entitled to do so with the benefit of such legal or other advice (for example, accounting, actuarial or valuation) as the trustee thinks appropriate. The trustee should then determine a course of action subject, again if it thinks appropriate, to obtaining judicial advice about that course of action.”

 

 
     

The Court continued:

“[Additionally,] in almost all cases an application for judicial advice should be accompanied by counsel's opinion. The content of that opinion will be a significant matter which the court will take into account in determining whether or not to give the advice sought.

 

The advice can be the opinion relied upon by the trustee in deciding upon its provisional course of action…or an opinion especially prepared for the purposes of the application.”

  

 
 2)    

The Trustee should endeavour to provide full materials and information to the Court

 

Section 78 of the Trustee Act provides that applications pursuant to Section 77 must be brought pursuant to a “written statement” signed by counsel and attorney. 

 

It shall always be highly advisable for the applicant trustee to disclose all relevant matters to the Court:

 

 “A Trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his fiduciary duties and discretions is always entitled to seek proper professional advice and, if so advised, to protect his position by seeking the guidance of the court. If however he seeks the approval of the court to an exercise of his discretion … he has always to bear in mind that it is of the highest importance that the court should be put in possession of all the material necessary to enable that discretion to be exercised.” (per Lord Oliver in Marley v Mutual Security Merchant Bank [1991] 3 All ER 198)

 

 

3)    

The Trustee should be concerned to ensure that relevant/interested parties are given notice of the application

An application pursuant to Section 77 of the Trustee Act is in the nature of a private application.  However, the Judge seised of the matter is empowered to direct that notice be served upon and the hearing attended by all persons interested in such application or such of them as the Judge thinks expedient. 

The Trustee should assist the court with identifying/settling the list of individuals who ought properly to receive notice of the application. 

 

 

The Effect of the Court’s Advice, Opinion or Directions under Section 77


As stated above, “A trustee or personal representative acting upon the opinion, advice or direction given by the Judge shall be deemed so far as regards his own responsibility to have discharged his duty as such trustee or personal representative in the subject matter of the said application.”


In addition to this, provided that the court’s advice, opinion and/or directions are embodied within an Order, the Trustee will receive the benefit of the statutory indemnity supplied by Section 98 of the trustee act which provides that “…this Act and every order purporting to be made under this Act shall be a complete indemnity to all persons for any acts done pursuant thereto and it shall not be necessary for any person to inquire concerning the propriety of the order or whether the Court by which the order was made has jurisdiction to make it.”


Costs of the Section 77 Application


Costs of Section 77 applications are “in the discretion of the Judge”.


However, the preponderance of authority holds that absent exceptional circumstances, a trustee (even when it has been hyper-cautious) should be entitled to recover its legal costs from the trust fund.  See for example: Re Buckton [1907] 2 Ch. 406 wherein Kekewich J. stated:


“…In cases of this character I regard the costs of all parties as necessarily incurred for the benefit of the estate, and direct them to be taxed as between solicitor and client and paid out of the estate. It is, of course, possible that trustees may come to the Court without due cause. A question of construction or of administration may be too clear for argument, or it may be the duty of trustees to inform a claimant that they must administer their trust on the footing that his claim is unfounded, and leave him to take whatever course he thinks fit. But, although I have thought it necessary sometimes to caution timid trustees against making applications which might with propriety be avoided, I act on the principle that trustees are entitled to the fullest possible protection which the Court can give them, and that I must give them credit for not applying to the Court except under advice which, though it may appear to me unsound, must not be readily treated as unwise. I cannot remember any case in which I have refused to deal with the costs of an application by trustees in the manner above mentioned.”


There is a paucity of reported instances in which a trustee has been deprived of its costs within the context of directions proceedings.  One such case was BA v Verite Trust Co Ltd, Re E, L, O and R Trusts [2008] JRC 150 wherein the Royal Court of Jersey held that “A trustee may only be denied an indemnity for its costs if it has acted unreasonably, which is a high hurdle” and that on the facts of that case, the court had:


“no hesitation in concluding that, during the course of 2006, Verite found itself in a position of plain and obvious conflict of interest and it should have retired without seeking an order from the court. Its decision not to do so was wrong to the extent that it can properly be characterized as unreasonable.”


Nevertheless, the Court in that case was at pains to stress the exceptionalism of the fact pattern under consideration and concluded stating:


“In many cases the position will be far less clear…In many cases, even where the court's decision is that the trustee should retire or be removed, the court will not conclude that the trustee has acted in such a way that it should be deprived it of its costs or remuneration. Everything will depend upon the facts of the specific case but the general approach remains that a trustee which is acting in good faith in what it perceives to be the best interests of the trust and the beneficiaries as a whole will not be deprived of its costs unless it has behaved unreasonably. That includes differences over whether the trustee should continue in office or not.”


Conclusion


In circumstances where trustees are faced with difficult questions concerning trusts under their stewardship or where they are faced with momentous decisions which could, for example, potentially give rise to substantial liability, it may be a counsel of prudence for that trustee (acting on expert advice) to seek the court’s opinion, advice and/or directions. 


A trustee who procures the court’s directions in this way and then acts upon them, will be afforded a substantial level of protection in the event of their decision being subsequently challenged/attacked.


1 Mowbray et al, Lewin on Trusts, (Thomson: Sweet & Maxwell, 2008), 18th ed’n at para. 29-299 (“Lewin”)


N. Leroy Smith, a Partner at Higgs & Johnson, focuses on all facets of trust law including representing fiduciaries and individual clients (both private and institutional) in a range of trust and estate litigation; and advising clients in the drafting and administration of Bahamian trusts.

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Monday, March 20, 2017
Finance & Banking