Fiduciary duties, trust property and investments
There is no way to tell the global economic damage from coronavirus, but it will have a severe negative impact. The chief economist at the Organisation for Economic Co-operation and Development (OECD), Laurence Boone, recently commented that ‘the shock to the world economy and living standard is absolutely unprecedented and it will have long-lasting effects’ stressing that ‘all OECD countries are in recession and a large number of them are in a double-digit recession’. This means trillions of dollars has been lost in economic output and the value of property and investments held in trust will be affected.
Nevertheless, trustees’ duties do not change because of the impact of coronavirus. These duties include statutory duties including specific investment and delegation duties. We will look at the specific duties for trustees under Jersey law. Article 21(1) of the Trusts (Jersey) Law 1984 (as amended) sets out the general fiduciary duties which trustees must adhere to. It provides that a trustee shall in the execution of his or her duties and in the exercise of his or her powers and discretions: (a) act (i) with due diligence, (ii) as would a prudent person, (iii) to the best of the trustee’s ability and skill; and (b) observe the utmost good faith. These are far-reaching duties, are principally judged objectively, and their applicability will change depending on circumstances.
Article 21(3) of the Trusts (Jersey) Law 1984 (as amended) stipulates the investment duties imposed upon trustees. It provides that, subject to the terms of the trust, a trustee shall (a) so far as is reasonable preserve the value of the trust property; (b) so far as is reasonable enhance the value of the trust property. The concept of diversification is not expressly referenced in the Trusts (Jersey) Law 1984 but practically the duties at article 21(3) should be achieved by trustees adopting a duty of diversification in making investments. While it may be the case that many trust instruments under Jersey law will expressly exclude the duties under article 21(3), trustees should nevertheless still be mindful of them. It is unlikely that a trustee will be protected by hiding behind the exclusion of these duties, as the general fiduciary duties will remain applicable and the trustee will, instead, be judged by those duties as to any investment losses: would a prudent person not diversify investments?
Article 25 of the Trusts (Jersey) Law 1984 (as amended) permits a trustee to delegate the execution or exercise of any of his or her trusts or powers (both administrative and dispositive) unless the trust instrument provides to the contrary; this includes the management of trust property. It would be unusual for a trust instrument not to permit a trustee to delegate in the manner provided for by article 25. However, article 25 only protects trustees from any loss arising from a delegation provided they acted in good faith and without neglect in making the initial delegation or permitting its continuation. This means trustees must ensure the delegate is suitable and performs, and continues to perform, as required. If the delegate does not, then the trustee must take action or can be personally liable for any losses arising.
In addition to the statutory obligations imposed on trustees, the trust documents and commercial agreements entered into by trustees may also put trustees under further duties or obligations that need to be adhered to. Trustees’ duties and obligations will continue to apply regardless of the surrounding circumstances of coronavirus. Trustees cannot contract out of their duties but they may seek to renegotiate obligations under commercial agreements, if other parties are willing.
What should trustees be doing to comply with their duties?
Trustees need to be constantly mindful of their duties and obligations and be proactive in taking steps as required to ensure they adhere to their duties and obligations. In doing so, trustees should undertake an analysis of the property held in trust and the likely impact of coronavirus. This may involve: (1) reviewing investment portfolios (whether under advisory or management) and reconsider any investment strategies; (2) reviewing real estate investments, any associated borrowing, rental incomes; (3) considering liquidity for loans made or due whether with financial institutions or beneficiaries, and (4) ensuring possession of up-to-date financial information for companies held in trust to consider any shareholding position.
Furthermore, trustees need to consider third parties, such as protectors or settlors, who have either positive or negative powers vested in them by the trust documents, particularly in respect of investment control. In the event of the death or incapacity of these third parties, trustees need to ensure either: (1) that the mechanics under trust documents work effectively to replace these persons to ensure administration is not hindered; or (2) they know if such vested powers revert back to the trustees as a default and which will add to existing duties.
Witnessing and execution of trust documents
Social lockdown and remote working as a result of coronavirus has brought into question the requirements for the execution of trust documents. Typically, trust documents are executed by corporate trustees under common seal by two authorised signatories, signatures of beneficiaries are independently witnessed and all are ‘wet-ink’ signatures. But is there a need for using the common seal (locked in offices), for beneficiaries’ signatures to be independently witnessed and for ‘wet-ink’ signatures to be applied when social lockdown or social distance rules apply?
Each jurisdiction has different witnessing formalities and different laws as to electronic signatures. For example, Jersey law does not recognise the English law concept of a ‘deed’ and so it has no specific meaning under Jersey law, despite it being a widely-used term. Consequently, there are no legal formalities associated with executing a ‘deed’ under Jersey law. Often a trust instrument will define a ‘deed’ to mean an instrument in writing signed by the parties and will not elaborate further as to an instrument in writing.
Furthermore, Jersey law does not have any specific witnessing formalities for trust documents signed by beneficiaries. Therefore, subject to any requirements of the trust documents, the usual requirement for independent witnesses to sign and confirm a beneficiary’s signature is for evidential purposes only.
Jersey law does not require a corporate trustee incorporated in Jersey to use its common seal to execute trust documents. It is standard for articles of association to provide that the common seal is only applied if the directors resolve to do so. Therefore, corporate trustees in Jersey always have the option to execute trust documents under hand rather than by using the common seal.
Article 12(3) of the Electronic Communications (Jersey) Law 2000 (as amended) provides that a signature, seal, attestation or notarisation is not to be denied legal effect, validity or enforceability only because it is in electronic form. Therefore, electronic signatures are permitted in Jersey provided the constitution of a trustee permits their use, the trustee resolves to execute a document electronically and the law or terms governing the document to be executed permit the use of electronic signatures for execution.
Regardless of any legally imposed requirements, it is additionally important for trustees to check:
- any required formalities or restrictions imposed by trust documents. A trust document may define certain formalities such as a ‘deed’, or an ‘instrument in writing’, or require independent witnesses and may specify a signature ‘in person’. The execution of a document is likely to be void if these formalities are not adhered to
- if the trustee is a corporate entity, any requirements or restrictions under articles of association or internal and regulatory procedures (including the use of electronic signatures), and
- the requirements and formalities of any foreign law governing documents to be executed by the trustees
The impact of coronavirus has meant trustees cannot meet face-to-face to hold meetings. Nevertheless, trustees need to resolve decisions in accordance with formal requirements in a meeting or by written resolution.
The use of virtual meetings by telephone or video conference, or the use of written resolutions circulated electronically, means it is important for trustees to check that: (1) the trust documents permit, or at least do not restrict, the use of virtual meetings or written resolutions; and (2) any applicable articles of association of corporate trustees permit the use of electronic communications or written resolutions. Otherwise, the resolutions undertaken are likely to be void.
It is particularly important for private trust companies to check any bespoke requirements in their articles of association and how decisions of the trustee should occur. For example, there could be provisions requiring meetings to be undertaken in certain locations, or be face-to-face, or require a combination of different classes of directors. If actions need to be taken by the trustee, this could necessitate changes to the articles of association or the appointment of alternate directors for particular actions.