UK Privy Council clarifies scope of trustee powers under proper purpose rule

Thursday, 15 December 2022
The Privy Council of the United Kingdom (Privy Council) has voided a 2005 transfer made by the trustees of one Bermuda-based family trust to another. The transfer caused USD560 million of assets settled for the benefit of members of a Taiwanese family to be no longer available to them.
Trust signing

The Wang family has created a business empire known as the Formosa Plastics Group (FPG), one of Taiwan's largest conglomerates. In 2001, its two founding brothers established some trusts, two of which were the Global Resource Trust (GRT) and the Wang Family Trust (WFT). The GRT was a discretionary trust for the benefit of individual members of the family and the WFT was a purpose trust for purposes including the perpetuation of FPG and charitable purposes, but conferring no benefit on family members.

In 2005, the GRT trustees, relying on powers of variation granted by the trust deed, transferred all the trust's assets to the WFT. These assets could thus no longer benefit individual family members. One of them, Winston Wong, challenged the trustees' actions in the Supreme Court of Bermuda, which ruled in his favour but was then overruled by the Court of Appeal of Bermuda. Winston Wong and another family member, Tony Wang, then appealed to the Judicial Committee of the Privy Council, the final court of appeal for Bermuda, asking for the transfers to be set aside.

There were two separate grounds of appeal. One was that the transfer of assets to the WFT violated the 'substratum rule', in that it altered the fundamental character of the trust. The other was that the transfer contravened the 'proper purpose rule', which states that trustees must exercise a trust power for the purpose for which is has been granted, in this case, to benefit the family beneficiaries. The trustees argued that trust deed itself had given them the power to add or remove 'any person or class or description of persons' to the beneficial class of the trust.

The Privy Court’s verdict agreed with appellants Tony Wang that the transfer contravened the rule that trustees must exercise a trust power for the purpose for which is has been granted. Although there is no overriding principle that all powers in any trust with individual beneficiaries must be exercised in the interests of the beneficiaries, it is necessary that the trustees act within the scope of the intention, or proper purpose, for which their powers are given. The trustee could not validly use its powers of addition or exclusion to destroy the interests of beneficiaries. This principle is not confined to cases involving reprehensible conduct.

The other ground of appeal was not accepted, with the Privy Council determining that there is no absolute substratum rule, although the underlying purpose of the trust is of ‘central importance’ to determining the purpose of a trust power (Grand View Private Trust Co Ltd & Anor v Wen-Young Wong & Ors (Bermuda), 2022 UKPC 47).

James Price, Head of Trust and Probate Litigation at law firm Stewarts, called the ruling ‘one of the most eagerly anticipated judgments of recent years’ and noted that the decision contained ‘a number of helpful comments which will assist trust practitioners in future cases’.

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