S.D. Freeman, R.K. Freeman and R Freeman v Ansbacher Trustees (Jersey) Ltd

CourtRoyal Court
JudgeBirt, Deputy Bailiff
Judgment Date09 January 2009
Date09 January 2009
Birt, Deputy Bailiff

A. Hoy for the plaintiffs;

N.F. Journeaux for the defendant.

Cases cited:

(1) Abacus (C.I.) Ltd., In re, 2000 JLR 165, referred to.

(2) Alhamrani v. Alhamrani, 2007 JLR 44, referred to.

(3) Bartlett v. Barclays Bank Trust Co. Ltd., [1980] Ch. 515; [1980] 2 W.L.R. 430; [1980] 1 All E.R. 139; (1979), 124 Sol. Jo. 85, referred to.

(4) Berezovsky v. Abramovich, [2008] EWHC 1138 (Comm), distinguished.

(5) Christensen v. Scott, [1996] 1 NZLR 273, referred to.

(6) Edgington v. Fitzmaurice (1885), L.R. 29 Ch. D. 459; [1881-85] All E.R. Rep. 856, referred to.

(7) Ellis v. Property Leeds (UK) Ltd., [2002] 2 BCLC 175; [2002] EWCA Civ 32, considered.

(8) Foss v. Harbottle (1843), 2 Hare 461; 67 E.R. 189, considered.

(9) Gardner v. Parker, [2004] 2 BCLC 554; [2005] BCC 46; [2004] EWCA Civ 781, distinguished.

(10) Hoechst UK Ltd. v. Inland Rev. Commrs., [2004] STC 1486; [2008] B.T.C. 659; [2003] EWHC 1002 (Ch), dicta of Park, J. considered.

(11) Johnson v. Gore-Wood & Co., [2002] 2 A.C. 1; [2001] 2 W.L.R. 72; [2001] 1 All E.R. 481; [2001] C.P.L.R. 49; [2001] BCC 820, distinguished.

(12) Khan (née Osman) v. Leisure Enterprises (Jersey) Ltd., 1997 JLR 313, referred to.

(13) Lemos v. Coutts (Cayman) Ltd., 2004-05 CILR 317; (2005), 8 ITELR 153, applied.

(14) Lucking's Will Trust, In re, [1968] 1 W.L.R. 866; [1967] 3 All E.R. 726; (1967), 112 Sol. Jo. 44, referred to.

(15) Manisty's Settlement, In re, [1974] Ch. 17; [1973] 3 W.L.R. 341; [1973] 2 All E.R. 1203, not followed.

(16) Midland Bank Trust Co. (Jersey) Ltd. v. Federated Pension Servs., 1995 JLR 352, applied.

(17) Paragon Fin. Plc. v. D.B. Thakerar & Co., [1999] 1 All E.R. 400, distinguished.

(18) Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2), [1982] Ch. 204; [1982] 2 W.L.R. 31; [1982] 1 All E.R. 354; [1981] Com. L.R. 265; (1981), 126 Sol. Jo. 32, distinguished.

(19) Schmidt v. Rosewood Trust Ltd., [2003] 2 A.C. 709; [2003] 2 W.L.R. 1442; [2003] 3 All E.R. 76; 2001-03 MLR 511; [2003] UKPC 26, applied.

(20) Shaker v. Al-Bedrawi, [2003] Ch. 350; [2003] 2 W.L.R. 922; [2002] 4 All E.R. 835; [2003] 1 BCLC 157; [2002] EWCA Civ 1452, distinguished.

(21) Walker v. Stones, [2001] Q.B. 902; [2001] 2 W.L.R. 623; [2000] 4 All E.R. 412; [2001] BCC 757, applied.

Legislation construed:

Royal Court Rules 2004 (Revised Edition, ch.07.770.72, 2008 ed.), r.6/13: The relevant terms of this rule are set out at para. 25.

Trusts (Jersey) Law 1984 (Revised Edition, ch.13.875, 2007 ed.), art. 1(1):

"'Beneficiary' means a person entitled to benefit under a trust or in whose favour a discretion to distribute property held on trust may be exercised."

art. 30(10): The relevant terms of this paragraph are set out at para. 51.

art. 57: The relevant terms of this article are set out at para. 28.

Texts cited:

Lewin on Trusts, 18th ed., para. 29-23, at 991; paras. 39-37 - 39-43, at 1570-1573; paras. 39-68 - 39-69, at 1584-1585 (2008).

Matthews & Sowden, The Jersey Law of Trusts, 3rd ed., para. 14.10, at 172 (1993).

Trusts—beneficiaries—locus standi—beneficiary of discretionary trust has locus standi to sue trustee for breach of trust and seek reconstitution of trust fund if object of fiduciary power (trust power or mere power) or has contingent interest under ultimate default trust

Trusts—trust assets—indirectly-held assets—strongly arguable that beneficiary not barred from suing for breach of trust by reflective loss principle (i.e. company not shareholder is proper plaintiff in action for loss to company), where loss caused by mismanagement of company wholly owned by trust to hold assets—strong policy reasons for simple and effective remedy for mismanagement of trust assets (i.e. action for breach of trust), whether assets held directly by trustee or indirectly through company

The plaintiffs brought proceedings against the defendant for breach of trust.

The plaintiffs were the beneficiaries of a discretionary trust, established in 1978, of which the defendant was trustee until 2000. The trust provided for the accumulation of income, subject to powers to appoint capital or income to the beneficiaries during the trust period, with ultimate default trusts in favour of the beneficiaries. The trust held all the shares in a company, which was the sole significant trust asset. An employee of the defendant, who had carried out most of the trust administration, had also been a director of the company until 2000.

The plaintiffs brought the present proceedings against the defendant alleging various breaches of trust and mismanagement of the company's affairs which had caused loss to the trust fund. The relevant events all occurred before 1997 and the defendant claimed that the plaintiffs and their lawyers had known of them since 2000 at the latest. Article 57(2)(b) of the Trusts (Jersey) Law 1984 provided a three-year prescription period, from the date on which a beneficiary first had knowledge of the occurrence of the breach, for an action against a trustee by a beneficiary founded on breach of trust. Article 57(3) provided that, in the case of a minor beneficiary, the three-year period would start to run when she ceased to be a minor. The third plaintiff ceased to be a minor on December 18th, 2004 and the order of justice, seeking reconstitution of the trust fund, was served on December 14th, 2007.

It was alleged that the defendant had been negligent in its management of the company. There was, however, an exculpation provision in the trust deed which purported to exclude liability on the part of the trustee for any loss to the trust fund unless caused by fraud. Article 30(10) of the Trusts Law provided that "nothing in the terms of a trust shall relieve, release or exonerate a trustee from liability for breach of trust arising from his own fraud, wilful misconduct or gross negligence." The plaintiffs applied to amend their order of justice to allege that the breaches of trust already pleaded constituted gross negligence. The limitation period for bringing claims for breach of trust had expired.

The defendant applied for the order of justice to be struck out and submitted inter alia that (a) the first and second plaintiffs' claims were prescribed under art. 57(2)(b) of the Trusts Law; (b) the plaintiffs were merely objects of powers under the trust and did not therefore have locus standi to bring the claims; (c) the exculpation provision in the trust deed provided a complete defence to the claims and the plaintiffs should not be permitted to introduce a new claim of gross negligence; and (d) the losses claimed by the beneficiaries were merely reflective of the losses suffered by the company and the claims were therefore barred by the rule against reflective loss, i.e. that the proper plaintiff in respect of a loss caused to a company was the company itself and that a shareholder could not bring an action to recover loss to its shareholding which was merely reflective of the loss to the company.

The first and second plaintiffs conceded that their claims were prescribed. The third plaintiff submitted that (a) she had locus standi to bring the proceedings both as an object of certain powers under the trust and as a beneficiary with a contingent interest under the ultimate default trust; (b) she should be permitted to amend the order of justice to allege gross negligence, which was not a separate cause of action but merely a label to characterize the breaches of trust already pleaded; and (c) the reflective loss principle did not apply in the present case.

Held, ruling as follows:

(1) The first and second plaintiffs' claims were prescribed under art. 57(2)(b) of the Trusts (Jersey) Law 1984, having been brought more than three years after they first had knowledge of the occurrence of the alleged breaches of trust, and they would be removed as plaintiffs in the action. As the third plaintiff's claim had been brought within three years of the date on which she ceased to be a minor, her claim was not prescribed pursuant to art. 57(3) ( paras. 28-30).

(2) The third plaintiff had locus standi to bring the proceedings both as an object of certain fiduciary powers under the trust and as a beneficiary with a contingent interest under the ultimate default trust. An object of a fiduciary power—whether a trust power (i.e. a power that the trustee was required to exercise) or a mere power (i.e. a power that the trustee had merely to consider from time to time whether or not to exercise)—had locus standi to bring proceedings for breach of trust and seek relief, including the reconstitution of the trust fund if loss had been caused to it by a trustee's breach of trust. It would be a matter of discretion for the court, in a particular case, as to what relief, if any, should be granted. The object of a mere power was clearly included in the definition of "beneficiary" in art. 1(1) of the Trusts Law. When considering the locus standi of discretionary beneficiaries to seek relief, a distinction was no longer drawn between the rights of objects of discretionary trusts and objects of fiduciary powers. The third plaintiff also had locus standi to bring the proceedings based on her contingent interest as a default beneficiary under the trust ( paras. 42-46).

(3) The third plaintiff would be granted leave to amend her order of justice to plead gross negligence, even though the limitation period for bringing an action for breach of trust had expired, as the amendment did not add a new cause of action. The amendment did not allege new facts or require new matters to be investigated. The third plaintiff relied on the breaches of trust already pleaded and merely asserted that they could be characterized as gross negligence. There was no additional element of mens rea in gross negligence as compared with ordinary negligence, as the term "gross negligence" was essentially a label to denote the degree of...

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