Representation of X Trustees Limited re Q and R Trusts: [2024] JRC 118

A Trustee (the Trustee), acted as the trustee of two trusts (the Trusts), applied to the Court for approval of several decisions regarding the Trusts. These included distributing the assets equally among four beneficiaries, winding up the underlying entities, and terminate the Trusts. This application followed a prior one in March 2023, in which the Court refused to bless the Trustee’s decision due to three main concerns:

• Potential conflict of interest: the Trustee had participated in a ‘Settlement Agreement’ and the Court wanted an explanation as to why this potential conflict did not affect the Trustee’s decision making (the Conflict-of-Interest Concern).
• Failure to consider tax liabilities: the Trustee, had failed to consider a worst-case tax scenario, which could disproportionately affect beneficiaries opting for a cash distribution versus those taking non-cash assets (the Tax Concern); and
• Reliance on a valuation that lacked independence: the Trustee relied on a valuation prepared for one group of beneficiaries, raising questions about its independence and objectivity (the Valuation Concern).

The Court had indicated it would consider another application if the Trustee revisited its decision. Subsequently, the Trustee reconvened in December 2023 and re-evaluated its position, taking steps to address the Court’s concerns. These steps were detailed in a new application being submitted in 2024.

The Trustee sought approval for:

• Distribution of Trust assets equally among the four main beneficiaries.
• Winding up the underlying entities and terminating the Trusts.
• Distribution of assets as either cash, receivables, or equity interests, ensuring non-cash distributions were adequately secured (the Implementation Decision).

During the hearing, the Court approved the first two decisions but postponed considering the Implementation Decision.

Trustee’s Response to the concerns raised in the 2023 Judgment:

Conflict of Interest Concern: The Trustee renegotiated the Settlement Agreement, resulting in amendments that disapplied certain terms, and sought legal advice from Mourant, which concluded that any potential conflict had been effectively managed through these amendments.

Tax Concern: The Trustee acknowledged the inevitable and significant tax liability but stressed the difficulty of predicting its exact quantum. It made efforts to assess a range of outcomes, ensuring tax liabilities were considered in its decisions.

Valuation Concern: The Trustee re-engaged the valuer to conduct a fresh valuation of Red Co. It also commissioned a second valuation from another valuer, which corroborated the initial valuation. The Trustee considered feedback from another expert engaged by one of the beneficiaries, although that expert’s input was not fully concluded.

Submissions by Respondents:

The Second to Seventh Respondents supported the Trustee’s decisions, agreeing that it was in the beneficiaries’ best interest to terminate the Trusts, given the ongoing tax challenges and the need to resolve family divisions. They agreed to cooperate with the Trustee in implementing the decisions, provided the Court approved them.

The Eighth Respondent, while agreeing that action needed to be taken, raised concerns about the decision-making process, arguing that the Court should not limit itself to reviewing whether the Trustee had addressed past concerns but should consider the entire decision afresh. The Court agreed with this broader review but concluded that the Trustee’s steps were sufficient.

The Guardian ad litem, (representing the minor and unborn beneficiaries), acknowledged that while the termination of the Trusts would prevent future generations from benefiting, the tax situation made continuation untenable. He endorsed the Trustee’s efforts to resolve the situation and encouraged family cooperation.

Court’s Conclusion

The Court noted that the Trustee had faced significant challenges due to uncertainties surrounding the Trusts’ tax liabilities, but it had taken reasonable steps to address the concerns raised in the 2023 Judgment. The Court found that the decisions had been made in good faith, were within the range of reasonable decisions a trustee could make and were not influenced by any actual or potential conflict of interest.

Thus, the Court blessed the Trustee’s decisions, save for the Implementation Decision, which was postponed, with the expectation that the Trustee would revisit the distribution methods to ensure the appropriate securing of non-cash assets.

Full Judgement Here