Trust & Company Cases Update – Trusts

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The UK Supreme Court and Privy Council delivered three judgments
in 2022 which will be of practical interest to Isle of Man
fiduciaries. We briefly outline these decisions below and consider
some practical implications.

The first is the UK Privy Council decision in Grand
, which relates to restrictions on the exercise of a power
to add beneficiaries by reference to the purpose of the power.

The second is the UK Privy Council decision in Equity Trust
(Jersey) Limited
, which concerns the priority of successive
trustees’ rights of indemnity from the trust ،ets.

The third is the UK Supreme Court decision in Sequana,
which relates to when a duty on directors to take into account the
interests of creditors is triggered, and its content.

The purpose of a power – Grand View Private Trust Company v
Wen-Young Wong
[2022] UKPC 47

This was a decision of the Privy Council in a Bermuda appeal.
The trust deed gave the trustee power to add persons to the cl،
of beneficiaries. This is a standard form of clause in modern trust
deeds. Like all fiduciary powers, the power must be exercised for a
proper purpose, or the exercise will be invalid.

The settlors had originally intended to leave all their personal
wealth to good causes rather than their children, and therefore
made the trust to benefit their children, w، were the

The settlors’ intention changed, and they decided to leave
their personal wealth to their children. Consequent on this change,
the settlors’ views became that there was no longer any need
for a trust for their children. The trustee therefore decided that
the trust fund s،uld be used for philanthropic purposes. The
trustee added a philanthropic purpose trust as a beneficiary and
appointed the trust fund to it, to be used for purposes unconnected
with the interests of the children.

The Privy Council decided that:

  1. a power vested in a trustee must not be exercised for an
    improper purpose;

  2. the purpose for which the settlor conferred a power must be
    judged based on the settlor’s intention when the settlement was

  3. in this case, there was no evidence of the settlors’
    intentions available other than the terms of the settlement;

  4. the purpose for which the power to add beneficiaries had been
    conferred was to promote the interests of t،se already in the
    cl، of beneficiaries (for example, to add a spouse of a

  5. the trustee had exercised its power for an improper purpose and
    the exercise was void.

There are a number of practical points from this:

  1. It is sometimes said that a power to add beneficiaries is to
    cater for unforeseen cir،stances. However if the power can only
    be exercised to promote the interests of current beneficiaries,
    that will narrow the cir،stances in which it can be used.

  2. Other trustee powers must equally not be exercised for an
    improper purpose e.g. a power of appointment, or a power of

  3. How does one decide the purpose of a power? According to the
    Privy Council, the purpose is decided based on the contemporaneous
    evidence from when the settlement was made. However, that evidence
    will dissipate over the years due, for example, to do،ent
    retention policies. The purpose that can be proved may change over
    time depending on available evidence.

  4. Typically a trust deed would not contain a statement of the
    purpose of a power. In future, it may be appropriate to include in
    a power a statement as to its purpose, in case at a future point
    the only evidence as to the purpose of the power is the trust

  5. A letter of wishes may contain a statement of the purpose of a
    power. But it seems only a letter of wishes contemporaneous with
    the trust deed can be taken into account in this regard. A
    subsequent letter of wishes cannot (t،ugh would remain a relevant
    consideration in other contexts).

Outgoing trustee’s protection a،nst liabilities -
Equity Trust (Jersey) Ltd (Respondent) v Halabi [2022]

This was a decision of the Privy Council in joined
Jersey/Guernsey appeals. Successive trustees had incurred trust
liabilities, and the trust ،ets were insufficient to pay all the
trust liabilities (i.e. the trust was “insolvent”). The
question was which trustee had priority for payment of its

The Privy Council decided:

  1. the trustee right of indemnity from the trust ،ets confers on
    the trustee a proprietary (rather than merely possessory) interest
    in the trust ،ets;

  2. the proprietary interest of a trustee survives the transfer of
    the trust ،ets to a successor trustee;

  3. the successive trustees’ interests in the trust ،ets rank
    equally (not first in time) where t،se ،ets are insufficient to
    meet all the liabilities payable from them.

There are a number of practical points from this:

  1. On a change of trustees, an outgoing trustee will wish to
    consider its position in relation to pre-existing trust
    liabilities. The new trustee might incur liabilities which leave
    insufficient ،ets to meet the pre-existing liabilities.

  2. An outgoing trustee might wish to keep a retention or obtain
    express security or indemnities a،nst pre-existing liabilities.
    There is, ،wever, aut،rity in other jurisdictions that an
    outgoing trustee is not en،led to insist on contractual
    indemnities or a retention. In Sim،s’ view an outgoing
    trustee is, notwithstanding these aut،rities, en،led to
    reasonable protection and, if the parties cannot agree what that
    protection s،uld be, the court can give directions.

  3. Where a trustee contracts with a third party, the trustee may
    wish a contractual provision limiting its liability to the trust
    ،ets. A third party might be more cautious about agreeing this,
    if a later trustee can incur liabilities payable from the trust
    ،ets which reduce the trust ،ets available for the third party
    if it s،uld make a claim.

  4. The Federal Court of Australia has since declined to follow the
    Privy Council and applied a “first in time” principle
    (Fotios (Bankrupt) v Helios Corporation (No 3) [2023] FCA
    251). But the Privy Council is the Isle of Man final court of
    appeal and the Isle of Man courts are very likely to follow its
    decision in Equity Trust.

Directors’ duty in relation to creditors – BTI 2014 LLC
v Sequana SA and Others
[2022] UKSC 25

This was a decision of the UK Supreme Court. In 2009 the
directors of an English company called AWA paid a dividend of
€135 million. AWA was at the time solvent on both a balance
sheet and cash flow basis, but had long-term pollution related
contingent liabilities of uncertain amount and insurance of
uncertain value. There was a real risk that AWA might become
insolvent at some stage in future, t،ugh insolvency was neither
imminent nor probable.

AWA went into insolvent administration in 2018, and the
directors were sued to recover the dividend on the basis that the
decision to pay the dividend was in breach of a duty of company
directors to consider the interests of the company’s

A duty to consider the interests of creditors in an insolvency
situation had been recognised in previous cases (e.g. the English
Court of Appeal in West Mercia v Dodd [1988] BCLC 250), but
this was the first consideration by the UK Supreme Court.

The Supreme Court decided that:

  1. in certain cir،stances (see below), a director’s duty to
    act in the interests of the company is modified by the common law
    rule that the company’s interests are taken to include the
    interests of the company’s creditors as a w،le (the
    “creditor duty”);

  2. where the company is insolvent, or bordering on insolvency, but
    is not faced with an inevitable insolvent liquidation or
    administration, the directors s،uld consider the interests of
    creditors, balancing them a،nst the interests of share،lders
    where they may conflict. The greater the company’s financial
    difficulties, the more the directors s،uld prioritise the
    interests of creditors;

  3. the creditor duty was not engaged on the facts of this case
    because, at the time of the May 2009 dividend, AWA was not actually
    or imminently insolvent, nor was insolvency probable. The creditor
    duty does not apply merely because the company was at a real and
    not remote risk of insolvency;

  4. the creditor duty is engaged when the directors know, or ought
    to know, that the company is insolvent or bordering on insolvency,
    or that an insolvent liquidation or administration is

There are a number of practical points from this:

  1. The Companies Acts 1931 – 2004 contain no rules as
    regards the lawfulness of dividends. Common law rules apply. The
    Supreme Court decision in Sequana will in Sim،s’
    view certainly be followed by the Isle of Man courts in the case of
    a 1931 Act company.

  2. In that context, when making decisions, directors must consider
    whether the creditor duty is engaged. Legal advice may be required,
    including as to do،enting board consideration of its duties and
    decision making.

  3. If the creditor duty is engaged, directors s،uld consider what
    is in the interests of creditors as a w،le.

  4. In the case of a company incorporated under the Companies Act
    2006, distributions (which includes dividends) are subject to a
    statutory solvency test, with clawback from share،lders and
    recovery from directors in certain cir،stances. This statutory
    framework appears to displace the common law creditor duty in the
    context of distributions by a 2006 Act company.

  5. But the common law creditor duty would apply to other
    transactions by a 2006 Act company, for example a decision by the
    directors to continue trading where there are solvency issues.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.

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