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The Jersey Law Review - June 2004

SHORTER ARTICLES AND NOTES

TRUSTEES' APPLICATIONS FOR DIRECTIONS AND THE EUROPEAN CONVENTION ON HUMAN RIGHTS

Paul Matthews

Introduction

1       Recently the Court of Appeal, relying on the European Convention on Human Rights, criticised the practice of trustees seeking directions from the Royal Court in the absence of third parties who might be affected by the directions given.  Given the importance to the Jersey economy of the trust industry, and in Jersey legal practice of such directions hearings, the matter deserves a comment here. 

2       In Sinel Trust Limited v Rothfield Investments Limited,[1] a settlor had vested the entire issued share capital in the first defendant Jersey company in trust for himself absolutely.  Subsequently, he instructed the trustee in writing to hold the shares to the joint order of himself and his long-term companion, Mrs Ellis (he having left his wife in England many years before to live in Switzerland with Mrs Ellis), during their joint lives and to the order of the survivor of them thereafter.  The settlor died, apparently domiciled in Switzerland, in 2001.  After his death Mrs Ellis procured the transfer of the company’s shares from the original trustees to the plaintiffs,[2] who acknowledged in writing that they held those shares on trust for Mrs Ellis absolutely under Jersey law.

3       Under the settlor’s will a Swiss notary was appointed executor of his estate.  The will directed that the devolution of the estate should be governed by English law, pursuant to the Swiss Federal Law on Private International Law.[3]  The substantive provisions of the will created a trust of various company shares and other securities in Bermuda for the benefit of Mrs Ellis during her life, and gave the residue of his estate also to Mrs Ellis.  The settlor had had two children with his wife, from whom he had never been formally divorced.  The executor took legal action in Switzerland, resulting in orders freezing assets there of the settlor and the defendant company, and also in orders requiring the trustees to comply with requests for information about the defendant company.

The application for directions

4       Mrs Ellis instructed the trustees to transfer the company shares to a new Anguilla trust.  The trustees were concerned as to whether they could do this safely in view of the actions in Switzerland.  They therefore sought directions from the Royal Court, joining Mrs Ellis as defendant.  In those proceedings Mrs Ellis sought an order that the trustees transfer the shares as she directed.  Subsequently the settlor’s wife and two (adult) children issued proceedings in Switzerland against Mrs Ellis, the defendant company and the trustees claiming that the will should be annulled, and seeking the transfer by Mrs Ellis of certain property including the shares in the defendant company, and other relief.  Mrs Ellis in her turn began proceedings in the English High Court against the family and the executor claiming to have the will established.  Hence there were proceedings on foot in three jurisdictions.

5       At the hearing of the trustees’ application for directions before the Royal Court,[4] the trustees referred to the potential risks to them and sought a direction that the executor and the family should be given notice of the Jersey proceedings so as to be able, if they wished, to intervene and argue against the order sought by Mrs Ellis for the transfer of the defendant company shares.  The Royal Court did not order the executor and family to be convened, but ordered ultimately that the company’s shares be transferred to Mrs Ellis or to her order, and authorised this order to be sent to lawyers for the family, although only in a redacted form.[5]  The Royal Court obviously did not have the benefit of any argument from the family or the executor, not least because these latter did not know of the proceedings in Jersey.  But nevertheless the Court took the view that they could not establish any claim recognisable by the Jersey Courts to the shares in the defendant company, and hence it was not necessary, in giving directions to the trustees, to convene the executor and the family.

The appeal

6       The trustees appealed to the Court of Appeal.[6]  A side issue here (not explored in the Court of Appeal) is whether the trustees, who had merely been seeking directions from the court, should have been appealing at all.  As Harman LJ once said in a well known case where trustees appealed against a direction that they should disclose trust documents to a beneficiary,

“This appeal, as it seems to me, is an irregularity.  Trustees seeking the protection of the court are protected by the court’s order and it is not for them to appeal.”[7]

7       This does not in fact mean that trustees must not appeal directions of the court under any circumstances.  What it means is that, if they do, they are no longer entitled automatically to be indemnified out of the trust fund, and thus are at risk personally as to costs.[8] 

8       Be that as it may, the Court of Appeal heard argument directed only to the question whether, before the Royal Court embarked on any assessment of the rival claims by Mrs Ellis, the executor and the family, the Royal Court ought first to have convened the executor and family as parties so that their evidence and arguments could be heard.

9       The leading judgment in the Court of Appeal, with which the other judges merely agreed, said this -

“With all respect to the Royal Court, in my judgment this question has merely to be stated to be seen to admit of only one answer.  To decide in favour of one party without having taken steps to give the other parties the opportunity to be heard was contrary to essential consideration of justice as administered in the Courts of Jersey, and contrary to the requirements of Article 6 of the European Convention on Human Rights.[9]  On this simple ground the judgment and order of the Royal Court cannot stand and needs to be discharged”.[10]

Criticism

10     With equal respect to the Court of Appeal, this reasoning appears to mistake what the court at first instance was being asked to do.  The Royal Court was not being asked to decide between the rival claims of Mrs Ellis on the one hand and the executor and family on the other.  Instead, the Court was being asked to decide whether the trustees should comply with the request of their apparently absolutely entitled beneficiary to transfer the assets as she instructed, whilst being aware of claims in respect of the same assets made by the executor and the family.  As Lord Oliver once put it in the Privy Council -

“…it should be borne in mind that in exercising its jurisdiction to give directions on a trustee’s application the court is essentially engaged solely in determining what ought to be done in the best interests of the trust estate and not in determining the rights of adversarial parties…Where beneficiaries oppose a proposal of a trustee with a host of objections of more or less weight, the court is, of course, inevitably concerned to see whether these objections are or are not well founded, but that must not be permitted to obscure the real questions at issue which are what directions ought to be given in the interests of the beneficiaries and whether the court has before it all the material appropriate to enable it to give those directions.”[11]

11     In the present case, the question was not being put by the trustees with a view to the court deciding as between the rival claims of Mrs Ellis and the family, but simply in order that the trustees should know whether or not they should hand over the assets as the beneficiary required, given the risks they considered that they faced.[12]  If the trustees complied with the direction of the Court, they would normally be protected against any personal liability under Jersey law to the executor or the family.  (Whether they would also be protected against liability under Swiss law is a much more difficult question, involving considerations of Swiss private international law and respect for the decisions of courts of competent jurisdiction of another country, and is beyond the scope of this comment). 

12     In a case where there is an arguable claim, the court will normally give such a direction as would “hold the ring” whilst facilitating the resolution of the dispute.  In the Royal Court, Birt DB had put it this way -

“The trustees are seeking directions as to whether they should comply with Mrs Ellis’ instructions.  Clearly under domestic Jersey law, on the face of it, they should; they hold as pure nominees for her.  It seems to us that we must consider whether, in the event of their transferring the shares as requested, there is a realistic possibility of the trustees subsequently being held personally liable to any person who may subsequently turn out to be the ‘true’ owner of the trust fund.  If there is a realistic possibility it would seem right to give the possible true owner the opportunity of appearing before the Court in order to argue his case.  If, on the other hand, there is no realistic possibility of anyone else being held to be the true owner of the assets, we should not, in the absence of any suggestion of fraud, direct the trustees to breach their duty of confidentiality towards their beneficiary by convening a stranger to the hearing.  We should simply enforce the express trust in the ordinary way”.[13]

13     So the decision of the Jersey court was not intended, and could not amount, to a determination of the rights of the executor and the family in the matter.  In Jersey law, as in English law, the general rule (with limited exceptions) is that only a party to an action is bound by the result,[14] and here there was no relevant exception.  In this case the court was simply being asked to decide what the trustees should do in the circumstances.  For this purpose it was not necessary to have all the information or submissions which would be necessary for a final determination of the executor’s and family’s rights, much less to make that determination.  It was necessary only to have the information which the trustee actually had in order to decide whether it was proper for the trustee on the basis of that information to act in the way in which it was proposing to act.  The Royal Court may or may not have reached the correct result in carrying out that exercise (the Court of Appeal in the event considered that it had not), but that was the exercise which, it is submitted, it was its duty to (and did) carry out.

14     A direct analogy can be drawn with a Beddoe[15] application, where the trustee is either considering launching legal proceedings for the benefit of the beneficiaries against a third party, or considering the defence of legal proceedings against the trustee by a third party.  In such a case the court is simply judging the reasonableness of the trustees’ actions in spending or not spending trust money on prosecuting or defending the proceedings.[16]  It is not determining whether or not the claim being made either by or against the third party is ultimately a well founded one.  That is to be determined thereafter.   Accordingly, and in order to encourage the trustee to speak frankly, and to place before the court all relevant information, including the legal advice which it has obtained, the third party is not convened to the proceedings.[17]  But, since the third party’s rights are not being determined, that is not an objection. 

15     So when the Court of Appeal criticised the Royal Court by saying ‘to decide in favour of one party without having taken steps to give the other party the opportunity to be heard’ the Court of Appeal was proceeding on an erroneous basis.  Rights and obligations as between Mrs Ellis and the trustees were being decided, i.e. the propriety of the trustees acceding to Mrs Ellis’s demand.  But they were both parties.  On the other hand, the executor and family were not.  However, their rights (if any) in respect of the shares were not being decided.  They were as free to sue Mrs Ellis for their return after the direction had been given as before, firstly because they were not party to the decision, and secondly because the direction did not decide that point.

16     It may be argued that the direction did determine the rights of the family and executor against the trustees, because the usual rule is that the trustees are protected from all liability if they comply with it.  But that is not so.  The trustees are not protected if -

(a)           they do not follow the direction; or
(b)           they have not accurately supplied the court with all the relevant information;

and (in the present case) they may not be protected at all in relation to proceedings in Switzerland.

17     It must be accepted that the direction procedure often has the practical effect of reducing the remedies available to the potential claimants, and their value.  It becomes more difficult to sue the trustees successfully, and the shares are no longer in Jersey.  But strictly speaking these are irrelevant considerations, as no rights or obligations have been determined and (even if they were) the potential claimants are not bound.  In any event, and as Birt DB had expressly said, a judge will only make such a direction where the matter is clear, not where it is arguable.

English authority

18     By coincidence, a similar question arose recently in the English High Court in the case of Re the trusts of X charity,[18] decided by the Vice Chancellor of the Chancery Division, Sir Andrew Morritt (who is also a senior judge of the English Court of Appeal).  In that case of the trustees of the charity were applying for directions of the court in relation to certain pending proceedings, and the question arose whether the Court was obliged by the European Convention on Human Rights to give judgment in public.  The Court ultimately held that in fact giving its judgment in private in the particular circumstances of the case did not infringe  the provisions of the Convention,[19] but the judge continued -

“There is however another ground on which the pronouncement of my judgment in private was justified.  As the opening words of article 6(1) make plain, it only applies to ‘the determination of civil rights’.   An application to the court by trustees for directions may well affect but does not normally determine the civil rights of anyone.  Similar procedures exist for the protection of other fiduciaries such as liquidators or receivers…. This, essentially administrative, jurisdiction is designed to provide guidance to the fiduciary as to the proper exercise of his powers in the problematic circumstances with which he is faced.  Only rarely could it be said to determine the rights of anyone.”[20]

19     It is respectfully submitted that this is the correct approach in Jersey as in England. 

Conclusion

20     Accordingly, it is necessary to distinguish two classes of case.  First, there are the cases where the Court is being asked to determine the rights of the parties, such as might occur if there were litigation between on the one hand Mrs Ellis and on the other the settlor’s executor and his family, as to entitlement to the shares in question.  This is the ordinary contentious action, typically begun in Jersey by Order of Justice.[21]  In such a case article 6 of the European Convention on Human Rights will usually be engaged, and persons whose rights are being thereby decided must be able to play a proper role in the determination of such rights.

21     The other case is where the issue for the court is whether the trustees should comply with the request or instruction of the beneficiary to convey the shares as she directs, so protecting the trustees from personal liability if it should turn out that the executors and family, rather than Mrs Ellis, were entitled to the shares.  In Jersey this type of proceeding would be begun by representation.[22]  But this procedure ex hypothesi does not determine the question of entitlement to the shares.  (Indeed, if it did, there would be no point in giving directions to a trustee in order to give him comfort about his personal liability in such a case.  The matter would have been determined and that would have been that.)  In the second case, the third parties’ rights are not normally being determined, and therefore article 6 does not require that they be parties.

22     The present case, of course, was of the latter kind and not of the former.  It is to be hoped that in future the Jersey courts will recognise and apply this distinction.

Paul Matthews is a solicitor of the Supreme Court of England and Wales and a consultant with the firm of Withers LLP, 16, Old Bailey, London, EC4M 7EG.

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