Fiduciary and Trust litigation: How to avoid it 5 April 2019 – Step Mauritius Fiduciary and Trust litigation: How to avoid it Peter Gillis, Stephenson Harwood LLP

Different types of trust dispute Introduction Different types of trust dispute Guidance for trustees facing each type of trust dispute and how they may be able to protect themselves Recent cases in 2018

Types of trust dispute ‘Trust’ dispute – dispute about the terms or administration of the trust Questions regarding the construction of the trust instrument How should the trustee exercise its powers? ‘Hostile’ trust disputes ‘Beneficiary’ dispute – dispute arising from a beneficiary alleging misconduct/breach of trust ‘Third party’ dispute – bringing or defending claims from/against third parties

Type 1: ‘Trust’ disputes How to approach a ‘trust’ dispute Main concern is the risk of acting in breach of trust Possible options for the trustee are: 1. Go ahead and act 2. Obtain the consent of the beneficiaries 3. Obtain directions from the court England – Civil Procedure Rules Mauritius – Section 62 of the Trusts Act 2001

Type 1: ‘Trust’ disputes Directions of the court Questions of construction of the trust instrument Guidance to the trustee in the exercise of its powers: ‘Blessing’ applications – where there is no real doubt, but a decision is ‘momentous’ Court is principally concerned with: Rationality Honesty Surrender of discretion cases

Type 1: ‘Trust’ disputes Recent cases from 2018 South Downs Trustees Ltd v GH [2018] EWHC 1064 (Ch) – England and Wales Trustee held 73% of the shares in a holding company Trustee received an offer to purchase underlying business Offer was a better outcome for beneficiaries than if business remained in trust and the trustee decided to accept Trustee sought judicial blessing of decision Court granted the application The court found the trustee had taken a “structured and logical” approach Potential conflict of interest was carefully investigated and managed

Type 1: ‘Trust’ disputes Recent cases from 2018 Re H Trust [2018] JRC 171 - Jersey Trust asset was a residential property in London worth £1m Illiquid with £112k of outstanding management fees owed to the trustee Trustee wanted to sell property and distribute proceeds Trustee applied to court for directions – it was opposed by all beneficiaries Court found: Trustee had not dealt with the conflict of interest – this was fatal to the application Trustee had not obtained tax advice Trustee needed to give reasonable time to beneficiaries to identify an alternate funding proposal

Type 2 ‘beneficiary’ disputes Hostile disputes between the Beneficiaries and the trustees founded on allegations of misconduct Examples include: Negligent management of trust assets Not acting impartially between beneficiaries Distributing funds to someone not within the beneficial class Acting without taking tax advice

Type 2 ‘beneficiary’ dispute How to protect against a ‘beneficiary’ dispute Prevention is better than cure Ensure there are adequate protections in the trust deed: Exoneration provisions ‘Anti-Bartlett’ clauses Duty to diversify assets ‘Undo’ transactions in breach of duty using doctrines of: Equitable mistake The ‘Re Hastings Bass’ Principle

Type 2 – ‘Beneficiary’ disputes ‘Undoing’ transactions Mistake: Transaction may be set aside where there is a discrepancy between the trustee’s intentions and the effect of the transaction Re Hastings Bass: Transaction may be set aside where: The Trustee has done something within the terms of its power The trustee has failed to take relevant considerations into account - this must amount to a breach of duty Doctrine narrowed following English Supreme Court decision in Pitt v Holt [2013] UKSC 26

Type 2 – ‘Beneficiary’ disputes Recent cases from 2018 M v St Anne’s Trustees Ltd - Guernsey Beneficiary borrowed from trust to fund a divorce payment Beneficiary repaid loan with transfer of companies to the trust worth more than the loan Trustee made balancing payment which triggered significant income tax liability Trustee sought to set aside the transaction under the Re Hasting Bass principle

Type 2 –’Beneficiary’ disputes Recent cases from 2018 M v St Anne’s Trustees Ltd - Guernsey First Guernsey case following English Supreme court decision in Pitt v Holt First instance court refused application on basis it would be “unconscionable” Guernsey Court of Appeal: Proceeded on assumption that Guernsey law would follow Pitt v Holt No “unconscionability” requirement Codification in other jurisdictions

Type 3 - ‘third party’ disputes Issues for the trustee in a ‘third’ party dispute Trustee bringing or defending claims against third parties Main issue for trustee is to ensure that it is indemnified Normal cost rules will apply in litigation (loser pays) Indemnity from the trust? Apply to court for a “Beddoe” order to protect the trustee Procedure is a mini trial Normally made before the third party claim is started

Type 3 – ‘third party’ disputes Recent cases from 2018 The Stingray Trust 2018– Cayman Proceedings attacking trust issued in Switzerland The trustee defended the claim Shortly after the Swiss proceedings were dismissed the trustee applied for “Beddoe” relief Before it could be heard similar proceedings were issued in Milan Court granted “Beddoe” application: It was necessary to defend the application as there was a substantial risk to the trust – although sanction was not open ended Failure to apply prior to defending Swiss proceedings was understandable

Type 3 “third party” disputes Recent cases from 2018 Investec Trust (Guernsey) Ltd v. Glenalla Properties Ltd [2018] UKPC 7 Mauritius – Section 36(1) Trusts Act 2001

Fiduciary and Trust litigation: How to avoid it Peter Gillis Stephenson Harwood LLP +44 207 809 2221 Peter.Gillis@shlegal.com