Protection from protectors

Thursday, 05 November 2015
Dawn Goodman and Emma McCall highlight a recent Guernsey case in which the protector of a trust who clung to office for too long was removed.

 

Key points

What is the issue? The Royal Court of Guernsey has sanctioned the first removal of a trust protector in Guernsey.

What does it mean for me? What matters most is the welfare of the beneficiaries and the competent administration of the trust in their favour.

What can I take away? If a protector is not working in harmony with the trustees and beneficiaries and the protector is at least partly responsible for such a state of affairs, the protector is susceptible to removal.

It has long been clear that a protector may be removed where they take action that is hostile to the interests of the beneficiaries – e.g. by pursuing claims against the trust,1 or making off with significant trust assets.2 In In the Matter of the K Trust,3 however, the Royal Court of Guernsey demonstrated that, even when circumstances are less extreme, a protector who clings to office for too long can be removed.

Facts of the case

The K Trust was settled in 1990. The protector, who was a financial advisor and subsequently a friend to the settlor, was appointed at the outset. The protector had very extensive powers under the trust deed, with the result that the trustee could do relatively little without the protector’s consent.

The settlor had provided his handwritten wishes around the time of settling the trust. These provided that, if his wife survived him, she should be the ‘first and only beneficiary’. This was consistent with his widow’s understanding that the settlor’s purpose in settling the K Trust was to make provision for her in the event of his death. In 1994, the settlor signed a memorandum of wishes, which was similarly worded; it provided that, upon his widow’s death, the trust assets should be distributed to her family members, ‘but subject always to such different wishes as [his widow] might express after [the settlor’s] death’.

In 2001, at the time of the settlor’s death, his widow was the only beneficiary of the trust. The trustee, in response to a request from the widow, added beneficiaries from 2003 onwards, including some of her nephews and nieces, the previous original trustee, the protector and a number of charitable organisations. Extensive distributions were made and then many of these beneficiaries were excluded in 2011.

Although relations were initially cordial between the protector and the settlor’s widow, following the settlor’s death and due to a breakdown in relations (which the protector acknowledged), the widow formally requested the protector to step down. This request was made on numerous occasions and was repeatedly rejected. The protector considered that she was privy to the settlor’s wishes and best placed to put them into effect. The widow ceased attending trustee meetings on the basis that she felt marginalised. Subsequently, the widow and three other beneficiaries (whom the Deputy Bailiff considered to be the chefs de famille of the various branches of the widow’s family) requested the trustee take steps to terminate the trust. The protector was not supportive; she disagreed with the trustee and its advisors as to how potential liabilities had been assessed and considered that the K Trust needed to continue to hold assets as a contingency against whatever liability might subsequently arise. All the adult beneficiaries made a formal and final request that she retire.

The protector, however, stood firm. Accordingly, 11 of the 14 adult beneficiaries of the K Trust, supported by the other adult beneficiaries, issued an application seeking the removal of the protector (the removal application). In response, the protector, who was concerned she might commit a breach of trust if she retired without appointing her successor, brought her own application seeking confirmation that, in the circumstances, she could legitimately retire (the retirement application).

The judgment

Like the Jersey court,4 the Guernsey court confirmed that it would apply similar considerations to the removal of protectors as to the removal of trustees. In coming to the decision to order the removal of the protector, the Deputy Bailiff endorsed the key principles established in Letterstedt v Broers:5 what mattered most was the welfare of the beneficiaries and the competent administration of the trust in their favour.

The Deputy Bailiff appeared to agree with the trustee’s assessment that there had been a breakdown in the relationship between the beneficiaries and the protector, with the result that the trust had become unworkable. Accordingly, the Royal Court granted the removal application.

It is now clear – at least in Jersey and Guernsey – that, if a protector is not working in harmony with the trustees and beneficiaries and the protector is at least partly responsible for such a state of affairs, the protector is susceptible to being removed, regardless of whether they were hand-picked by the settlor. Indeed, the Royal Court rejected the argument that such a protector should only be removed in exceptional circumstances (as suggested in the Isle of Man case of Re Papadimitriou).6

In response to the retirement application, the Royal Court confirmed that the protector could vacate office without being obliged to name a successor protector; the application was effectively unnecessary because such a step was not precluded by the trust deed. Accordingly, the Deputy Bailiff confirmed the protector would not be at risk of action for breach of duty in retiring

What about the protector’s documents and the ongoing duty of confidentiality?

In this particular case, the Deputy Bailiff decided that, because the trustee had a full set of trust papers, the protector agreed to provide all reasonable assistance to her successor, and she accepted that she had an ongoing obligation of confidentiality, she would not be obliged to deliver up copies of the trust documents she held.

The judgment emphasised the obligation of confidentiality of a fiduciary even when they have ceased to act in their role and whatever the extent of the breakdown of relations with the beneficiaries. This should be borne in mind by any retiring (or removed) fiduciary.

Given possible concern about the inherent dangers of leaving sensitive and confidential documents in the possession and control of a former protector, it may be advantageous to draft into settlement deeds an obligation to return all documents and copies when ceasing to hold office. In any event, particularly sensitive documents can be provided by the trustee to the protector on the explicit basis that they belong to the trustee and must be returned.

Is the protector entitled to an express indemnity?

The K Trust decision clarifies that, if there is no indemnity in the trust deed and the law of the jurisdiction confers no indemnity beyond that of being indemnified for out-of-pocket expenses properly incurred, the protector cannot expect to obtain further protection.

The Deputy Bailiff accordingly refused to grant the protector either an open-ended blanket indemnity or a narrower indemnity in respect of possible liabilities to which the protector submitted she might be exposed. He explained that indemnities given to third parties are provided on a case-by-case basis, taking into account the relevant circumstances at the time.

Although their position is similar to that of a trustee, a protector is not in a position to argue for indemnities because a protector never holds trust assets. So, while it is conceivable that a trustee as an asset holder may become exposed to liabilities, such as tax, which may descend on the trustee after stepping down from their role, the same does not apply to a protector.

A warning to protectors who wish to cling on

The judgment is a stark warning to protectors that, where they are requested to retire by all or the majority of beneficiaries, they should respond without delay and consider negotiating a prompt exit. The fact the protector may have been appointed by the settlor does not mean they can consider themselves to be enshrined in that role.

As the Deputy Bailiff stated in K Trust: ‘History is littered with people who have hung on to office for longer than was wise and whose reputations have suffered as a result… I have reached the conclusion that [the protector] should have realised much earlier than she apparently did how untenable her position had become.’

  • 1. Re VR Family Trust, Centre Trustees (CI) Ltd v Van Rooyen [2009] JRC 109
  • 2. Re the Freiburg Trust [2004] JRC 056
  • 3. Guernsey Judgment 31/2015
  • 4. As confirmed in In the Matter of the A Trust [2012] JRC 169A
  • 5. (1883–84) LR 9 App Cas 371
  • 6. [2004] WTLR 1141
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Dawn Goodman and Emma McCall

Dawn Goodman TEP is a Partner and Emma McCall is an Associate in Withers’ Contentious Trust and Succession Group. Withers won STEP’s Contentious Trust and Estates Team of the Year Award 2015/16.

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