Invalidity of protector appointments

18 December2015

Article first published in eprivateclient in December 2015

The Royal Court of Jersey has recently provided important guidance as to when the Court may hold the exercise of a fiduciary power to be invalid and in so doing has delivered the first judgment in Jersey setting aside an appointment of protectors on grounds of irrationality of appointment rather than conduct in office.

In the Representation of Jasmine Trustees Limited & Another [2015] JRC196 (in which Appleby acted for the successful applicant beneficiary) the Court took the exceptional step of setting aside the purported appointments of both Protectors and Trustees.

In its judgment, the Court confirmed that any person who appoints a new trustee or protector is exercising a fiduciary power. Accordingly, all such appointments must be made in good faith and in the interests of the beneficiaries as a whole. In addition, the power must be exercised reasonably, with the appointor having taken into account only relevant matters. The appointor may not exercise the power for an ulterior purpose.

In this instance, which concerned two family trusts, the appointors were an outgoing protector and a majority of the adult beneficiaries. The Court’s ruling therefore is helpful in setting out the duties owed by all appointors, whether they are trustees or other persons connected with the trust.

Background to the application

The proceedings were initially brought by the trustees of both trusts. The applications were prompted by the actions of the then protector (the father in this case), who had attempted to remove the current trustees and replace them with previously unknown trustees. As the current trustees were not satisfied with the information provided by proposed new trustees, they sought directions from the Court as whether they ought to put into effect the Protector’s wishes of appointing new trustees. However, by the time of the hearing, all the adult beneficiaries (including the Protector) had indicated that they did not support the appointment of the new trustees.

In addition to the trustee issue, the Court upon the application of one of the beneficiaries was also asked to determine the purported appointment of two sons (who were also beneficiaries of the trusts) as protectors. In respect of one trust, the father as Protector had sought to appoint his sons as his successors to the role of protector, and in respect of the other trust, the majority of the adult beneficiaries had sought to appoint the sons as protectors.

Those protector appointments were challenged by the daughter (another adult beneficiary) on the basis that they were invalid or, alternatively, that the new protectors ought to be removed.

Appointment of Trustees

The Court found that the father had failed to take into account material factors including the expertise, experience and financial standing of the new trustees, but had taken into account immaterial factors. The Court therefore concluded that his decision to appoint the new trustee was not a decision which a reasonable appointor could reach and was thus invalid.

Appointment of Protectors

As indicated above, the Court also found that the appointments of the protectors were invalid.

In its judgment, the Court reiterated that it was not for the Court to interfere in a reasonable decision, rather the Court’s jurisdiction could only be invoked if an appointor had made a decision that no reasonable appointor could reach.

There were three main reasons why the Court found the decision to appoint the brother as protectors was unreasonable. First, there was found to be an actual or potential conflict of interest arising from litigation in the United States (where the brothers and sister were on opposing sides although there was a conflict of evidence as to the materiality and nature of this litigation). Secondly, the sons were found to be insufficiently independent from their father, who had arguably behaved in an inconsistent and controlling way towards the daughter while he was protector. Finally, the Court agreed with the daughter that there had been a complete and irretrievable breakdown in relations between the daughter and the rest of the family meaning that the brothers would be unsuitable to act as protectors of trusts of which the daughter was a beneficiary.

Conclusion

This case has shown that when the details and circumstances are analysed in a comprehensive and forensic fashion, appointments may be found to be invalid.

As such, this case serves as an important reminder to all appointors to consider their duties carefully when exercising fiduciary powers to ensure that they are acting reasonably, and in good faith, taking into account only the relevant factors when making an appointment.

Going forward, as best practice, practitioners should ensure that appointors prepare contemporaneous notes explaining why the appointment in question is considered appropriate and reasonable. Bearing in mind the Court’s ruling that a person is exercising a fiduciary power when appointing a protector, such an exercise would underline the importance of the appointment, and ought to bring to light any potential issues which could expose the appointment to challenge.

 

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