Representation of K Trustees Limited: [2024]JRC 187 and 185

In 2015, the First Respondent, (the Widow) and her late husband (the Husband) established a Trust (the Trust). The Widow and the Husband contributed the following assets to the Trust:

• Shares in a Jersey company (the Jersey Company) (the Husband settled his shareholding in the Jersey Company (three out of the nine issued shares) and the Widow settled her shareholding in the Jersey Company (six out of the nine issued shares). The assets of the Jersey Company comprised:
  • Cash and investment assets valued at £3,582,422.00 (mostly settled by the Husband into the Jersey Company)
  • A piece of immovable property which had a value as at October 2022 of £3,450,000.00 (this had previously belonged to the Widow and was settled by the Widow into the Jersey Company) (the Property)
  • A piece of commercial immovable property (which had previously belonged to the Widow and was settled by the Widow into the Jersey Company).
• The assignment of loans totalling £3,074,678 owed to each of the Widow and Husband by the Jersey Company

At the time of the Trust’s constitution, the beneficiaries of the Trust were the Widow and the Husband. The Husband died in September 2020. The Widow was reliant on the Trust for financial support.

The Widow instigated proceedings (the Proceedings) challenging the transfer into trust of her shares in the Jersey Company. The Widow alleged that she effected the transfers under the undue influence and or misrepresentation of the Husband. The relief sought in the Proceedings was a declaration that the Trust is invalid or unenforceable in relation to the shares in the Jersey Company that previously belonged to the Widow or in the alternative, an order that the current trustee of the Trust (the Trustee) cause for the Property to be distributed to the Widow (which was at the time, the Widow’s main place of residence).

Ordinarily, in hostile proceedings concerning trusts, it is expected that a trustee remains neutral and that the beneficiaries of the trust defend those proceedings. However, in this case, the only current beneficiary of the Trust was the Widow. The instrument of trust establishing the Trust did have a provision that certain contingent beneficiaries (the Contingent Beneficiaries) could be added as beneficiaries of the Trust but only upon the demise of the Widow.

As such, the Trustee sought the Royal Court’s blessing for it to defend the Proceedings. In addition, the Trustee sought directions as to whether:

• The Contingent Beneficiaries’ costs could and should be funded from the assets of the Trust.
• The Widow could continue to be funded by the Trust
• If any such costs are to be funded on what basis and from when and whether they should be subject to any final order the court may make in the Proceedings.

The legal position

The court reminded itself that it had jurisdiction to give the Trustee directions under Article 51 of the Trusts (Jersey) Law 1984 (the Trusts Law). In the context of providing directions to Trustees for the defending of hostile litigation, the Court reiterated that the follow matters must be considered by the Court, when asked to approve a course of action sought under the Trusts Law:

• Whether the proposed course of action is within the powers of the trustee.
• If so, whether the proposed course of action is a proper exercise of that power. In so doing the Court must be satisfied that:
  • The trustee’s opinion has been formed in good faith.
  • The opinion is one a reasonable trustee would make
  • The opinion has not been vitiated by any actual or potential conflict of interest
• Has the trustee surrendered its discretion to the Court
• Have the trustees already taken the action which is being challenged

The Court further noted that where a trustee seeks direction as to whether to participate in hostile proceedings, that the Court should adopt a more direct, inquisitorial role and be ready to form its own judgement as to whether it is sensible for the assets of a trust to be put at risk.

On the position of costs, the court reminded itself that Article 53 of the Trusts Law provided that the Court could order for the costs and expenses of and incidental to an application to the court under the Trusts Law to be paid out of the assets of the Trust or to be borne and paid by such person(s) as it thinks fit.

The decision

The Court agreed that the Proceedings should be defended and for the Trustee be indemnified from the assets of the Trust in doing so. The Court concluded that the Trustee was the appropriate party to defend the Proceedings, particularly given that pursuant to the Proceedings, the Widow was not seeking the setting aside of the Trust itself. The Court ordered that the costs incurred by the Contingent Beneficiaries and the Widow also be paid from the assets of the Trust.

The Court strongly encouraged the parties to seek to agree a settlement of the Proceedings and expressed the view that the Trustee take the lead in those discussions (the Settlement Discussions).

Subsequent developments

Following the hearing referred to above, the Widow subsequently died in February 2024. The executor of the Widow’s estate (the Executor) brought an application (the Executor’s application) seeking the following orders (amongst others):

• That the Trustee be ordered to settle all legal costs of the Widow up to her death pursuant to the orders made previously; and
• That the legal costs incurred by the Executor both in making this application and continuing with the Proceedings be funded by out of the assets of the Trust

The Settlement Discussions

As encouraged by the Court, the parties entered the Settlement Discussions. Whilst the Court was not asked to determine whether a binding agreement had been reached because of the Settlement Discussions, it did not that at the very least an agreement in principle was reached.

However, no draft settlement agreement to record the agreement reached at the Settlement Discussions had been produced by the Advocate representing the Trustee. In the intervening period, the Widow had been admitted to hospital and whilst the Widow had capacity for day-to-day decision making, seemed unlikely to have capacity to enter into the settlement agreement. The Widow died in February 2024 which made it impossible to fulfil some of the terms of the agreement reached at the Settlement Discussions.

The decision on the Executor’s application

The Court held that upon the Widow’s death, they ceased to be a beneficiary of the Trust. As such it was not open to the Trustee to continue to pay the costs of now the Widow’s estate, to continue to pursue the Proceedings. Whilst the Court noted that it had an inherent jurisdiction to order pre-emptive costs orders, that discretion should only be exercised where the claim being pursued benefits the trust. In this case, the Proceedings, if successful would not have benefited the Trust.