Return to Contents Trustees’ Responsibilities In Relation To Underlying Companies Peter Cushen All those involved with the provision of offshore trust and company services are familiar with the typical structure of a trust being established to own an underlying private company. The purpose of this article is to consider briefly the issues that arise under Jersey law in relation to a trustee’s responsibilities in such a situation and how those issues should be addressed. The general standard of care The general standard of care owed by a trustee is set out in Article 17 of the Trusts (Jersey) Law, 1984, as amended ("the Law") the material part of which provides as follows: "(1) A trustee shall in the execution of his duties and in the exercise of his powers and discretions - (a) act - (i) with due diligence; (ii) as would a prudent person; (iii) to the best of his ability and skill; and (b) observe the utmost good faith. (2) ................................ (3) Subject to the terms of the trust, a trustee shall - (a) so far as is reasonable preserve the value of the trust property; (b) ............................... (c) so far as is reasonable enhance the value of the trust property." In considering the application of these provisions to the duties owed by trustees, the Royal Court has had regard to English authorities as being stro persuasive: see, for example, West and others v Lazard Brothers & Co. (Jersey) Limited and another [1]and Midland Bank Trustee (Jersey) Limited and others v ated Pension Services [2] . There are two main English cases in point. In the case of Re Lill Trusts [3] Cross J. said this: "What steps, if any, does a reasonably prudent man who finds himself a majority shareholder in a private company take with regard to the management of the company's affairs? He does not content himself with such information as to the management of the company's affairs as he is entitled to as shareholder, but ensures that he is represented on the board. He may be prepared to run the business himself as managing director or, at least, to become a non-executive director while having the business managed by someone else. Alternatively, he may find someone who will act as his nominee on the board and report to him from time to time as to the company's affairs. In the same way trustees holding a controlling interest ought to ensure so far as they can that they have such information as to the progress of the company's affairs as directors would have. If they sit back and allow the company to be run by the minority shareholder and receive no more information than shareholders are entitled to, they do so at their risk if things go wrong." In the later case of Bartlett v Barclays ust Co Ltd [4]Brightman J explained that it might be possible for a trustee to comply with his duty in this regard without actually appointing a representative to the board: "[Cross J] was merely outlining convenient methods by which a prudent man of business (as also a trustee) with a controlling interest in a private company, can place himself in a position to make an informed decision whether any action is appropriate to be taken for the protection of his asset... Alternatives which spring to mind are the receipt of copies of the agenda and minutes of board meetings, if regularly held, the receipt of monthly management accounts in the case of a trading concern, or quarterly reports. Every case will depend on its own facts... The purpose to be achieved is not that of monitoring every move of the directors, but of making it reasonably probable, so far as circumstances permit, that the trustee or (as in the Lucking case) one of them will receive an adequate flow of information in time to enable the trustees to make use of their controlling interest should this be necessary for the protection of their trust asset, namely, the shareholding... It was not proper for the bank to confine itself to the receipt of the annual balance sheet and profit and loss account, detailed annual financial statements and the chairman's report and statement, and to attendance at the annual general meetings and the luncheons that followed, which were the limits of the bank's regular sources of information. Had the bank been in receipt of more frequent information it would have been able to step in and stop, and ought to have stopped, Mr. Roberts and the board embarking on the Old Bailey project." Unfortunately in this imperfect world it is not always possible to arrange for the trustee to be represented on the board of directors or for a flow of adequate and timely information, such as copies of agendas in advance of meetings, management reports or even board minutes. The prospective trustee may therefore have to look for protection to exoneration provisions contained in the instrument of trust. Exoneration It is common to find in an instrument of trust provisions purporting to exonerate the trustee in relation to a breach of the above duties. The following are examples of such exoneration provisions: (a) Supervision of Company "The Trustees are under no duty to enquire into or interfere with the management or conduct of the business or affairs of a company in which they are interested, unless they have actual knowledge of circumstances of a dishonest nature which call for enquiry." (b) Liability of Trustees "A Trustee shall not be liable for a loss to the Trust Fund unless that loss was caused by a breach of trust arising from his own fraud, wilful misconduct or gross negligence." (c) Investment "... The Trustees are under no obligation to diversify the Trust Fund, nor to preserve or enhance the value of the Trust Fund." The validity of such provisions needs to be carefully considered. It is important to note that all exoneration provisions must be read subject to Article 26(9) of the Law, which provides as follows: "Nothing in the terms of a trust shall relieve, release or exonerate a trustee from liability for breach of trust arising from his own fraud, wilful misconduct or gross negligence." This provision has been applied recently by the Royal Court in order to strike out an exoneration clause contained in a trust to the extent that the clause offengainst the article: see West and others v Lazard Brothers & Co. (Jersey) Limited and another, supra [5] . In that case, the Court approved the following comments of Brightman J. in the Bartlett case in relation to the high duty of care owned by professional trustees: "So far, I have applied the test of the ordinary prudent man of business. Although I am not aware that the point has previously been considered, eriefly in Re Waterman's Will Trusts [6], I am of opinion that a higher duty of care is plainly due from someone like a trust corporation which carried on a specialised business of trust management. A trust corporation holds itself out in its advertising literature as being above ordinary mortals. With a specialist staff of trained trust officers and managers, with ready access to financial information and professional advice, dealing with and solving trust problems day after day, the trust corporation holds itself out, and rightly, as capable of providing an expertise which it would be unrealistic to expect and unjust to demand from the ordinary prudent man or woman who accepts, probably unpaid and sometimes reluctantly from a sense of family duty, the burdens of trusteeship. Just as, under the law of contract, a professional person possessed of a particular skill is liable for breach of contract if he neglects to use the skill and experience which he professes, so I think that a professional corporate trustee is liable for breach of trust if loss is caused to the trust fund because it neglects to exercise the special care and skill which it professes to have." This was approved in the case of Midland Bank Trustee (Jersey) Limited and others v Federated Pension Services, supra, where the Jersey Court of Appeal further held that clauses relied on by trustees as exculpating them from liability for breach of trust are to be construed narrowly and strictly. Such exoneration clauses may therefore fail to protect a trustee where, for example, such trustee is considered to have acted with gross negligence. Indemnity It may be possible to obtain relief or an indemnity from the beneficiaries in relation to the duties owed to them by the trustee. Article 26 of the Law provides as follows: "(5) A beneficiary may - (a) relieve a trustee of liability to him for a breach of trust; (b) indemnify a trustee against liability for a breach of trust. (6) Paragraph (5) shall not apply unless the beneficiary - (a) has legal capacity; (b) has full knowledge of all material facts; and (c) is not improperly induced by the trustee to take action under paragraph (5)." Often, however, there will be minor or unascertained beneficiaries and it will therefore not be possible to obtain perfect relief or indemnity. It is therefore appropriate to consider whether the activities required of the trustee can be authorised in the instrument of trust so as not to constitute a breach of trust. Clauses which avoid a breach of Where a trust is being established to hold shares in a company which is to undertake particular transactions which might amount to a breach of trust, consideration may be given to including a provision in the trust as follows: "(1) The Settlor hereby declares that in anticipation of this Trust he has caused to be incorporated in Jersey a company with limited liability known as [insert name] Limited ("the Company") whose shares shall form part of the Trust Fund. (2) The Trustees shall cause the Company to enter into and perform the follow documents/ transactions [and the transactions set out in those documents]: (a)... (b)... (c)... (3) For the avoidance of doubt, it is hereby declared that the Trustees shall be obliged to execute and perform the matters set out in (1) and (2) above. In no circumstances other than fraud, wilful misconduct or gross negligence in the performance of the said documents and transactions shall the Trustees be liable for any loss to the Trust Fund in relation thereto." Furthermore, consideration might be given to actually prohibiting the trustee from involving itself with an underlying company, by including some such provision as follows: "Notwithstanding any other provision of this Trust, express or implied by law, the Trustees shall in no circumstances act as directors of [insert name] Limited or otherwise be concerned in the management of [insert name] Limited." However, this may be detrimental to the interests of the beneficiaries, and its effectiveness is doubtful. If such clauses are used, any powers of variation or appointment in the trust should be expressly restricted so that the trustee cannot be accused of not having utilised those powers in the interests of the beneficiaries to change the protective or restrictive provisions. Even so, it may be arguable that the trustee should have made an application to the Court under Article 43 of the Law or in exercise of its inherent jurisdiction to vary the ter trust: see Re the Osias 1980 Settlements [7] . Different classes of A further possibility is the creation of shares of different classes, so that the shares held in the trust have rights to dividends only, and other shares (not held in the trust) are issued with rights to vote, receive information, etc. However, this will often fail to meet the planning objectives of the exercise. A final consideration might be to incorporate a special purpose company to act as trustee, which in turn might be owned by a charitable (or non-charitable purpose) trust. However, it is still necessary in that case to consider the potential personal liability of "directors" (as defined) of corporate trustees under Article 52 of the Law. There are two ways of addressing this risk. Firstly, it would seem to be possible to provide a wider exoneration for such persons than it is for the trustee itself. The following clause might be appropriate: "Every director within the meaning of Article 52(3)(a) of the Trusts (Jersey) Law 1984 of a corporate Trustee who is deemed to be a guarantor of such Trustee by virtue of such Article shall be indemnified out of the Trust Fund and the beneficial interests of the Beneficiaries in the Trust Fund in respect of all loss or damage incurred by him through the application of that Article in relation to this Trust unless that loss or damage was caused by his own fraud." Secondly, the risk can be reduced by having the trust company incorporated under the law of a jurisdiction such as the British Virgin Islands, which (unlike Jersey law) permits corporate directors. Conclusion In conclusion, then, how should a prudent trustee address the issues that arise in relation to an underlying company? In my view, it is appropriate to address the matter in the following way: 1. Is it possible for the trustee to be represented on the board of directors? 2. If the answer to 1. above is no, is it possible to arrange for the flow of adequate and timely information e.g. copies of agendas in advance of meetings, copies of minutes and management reports etc? 3. Is there a full and valid exoneration clause in the instrument of trust? 4. Are the settlor and beneficiaries prepared to give their consent to full indemnities? Does this still leave the trustee vulnerable to claims by minor, unborn or unascertained beneficiaries? 5. Are there any other protective or restrictive provisions that can be included in the instrument of trust? 6. Is it possible to issue different classes of share and hold in trust only the shares with rights to receive dividends but no voting shares? 7. Should a private trust company be formed to act as trustee? If so, will the "directors" (as defined in Article 52(3)(a) of the Law) be protected? 8. Does the trustee have adequate professional indemnity insurance cover in the event of a claim? 9. Do the proposed fees bear a proper relationship to the responsibility and time costs involved? As ever, each case will turn on its own facts and it is my view that it is inappropriate to have a rigid policy in relation to the acceptability of such business. Peter Cushen is an advocate of the Royal Court of Jersey and a partner in Messrs. Crills, P.O. Box 72, 44 Esplanade, St. Helier, Jersey JE4 8PN. |