The Esteem Settlement and The No. 52 Trust

CourtCourt of Appeal
JudgeGloster, Sumption and Rokison, JJ.A.
Judgment Date17 September 2001
Date17 September 2001
Gloster, Sumption and Rokison, JJ.A.

J.A. Clyde-Smith for the trustee;

N.F. Journeaux for the plaintiff;

The first defendant did not appear and was not represented.

P.C. Sinel for the second and third defendants;

The fourth and fifth defendants did not appear and were not represented.

Cases cited:

(1) Abdel Rahman v. Chase Bank (C.I.) Trust Co. Ltd., 1984 J.J. 127, followed.

(2) Abidin Daver, The, [1984] A.C. 398; [1984] 1 All E.R. 470; [1984] 1 Lloyd's Rep. 339; (1984), 128 Sol. Jo. 99, followed.

(3) Allen-Meyrick's Will Trusts, In re, [1966] 1 W.L.R. 499; [1966] 1 All E.R. 740; [1965] C.L.Y. 3563; (1965), 109 Sol. Jo. 957, considered.

(4) Cameron dcd., In re, [1999] Ch 386; [1999] 2 All E.R. 924; [1999] T.L.R. 271; (1999), 96 (16) Law Soc. Gaz. 35; 149 New L.J. 522, considered.

(5) Clore's Settlement Trusts, In re, [1966] 1 W.L.R. 955; [1966] 2 All E.R. 272; (1966), 112 Sol. Jo. 254, followed.

(6) Cowan v. Scargill, [1985] Ch. 270; [1984] 2 All E.R. 750; [1984] I.C.R. 646; [1984] I.R.L.R. 260; (1984), 81 Law Soc. Gaz. 2463; 128 Sol. Jo. 550, followed.

(7) Edge v. Pensions Ombudsman, [1998] Ch. 512; [1998] 2 All E.R. 547, considered.

(8) Gulbenkian's Settlements (No. 2), In re, [1970] 1 Ch. 408; [1969] 2 All E.R. 1173; (1969), 113 Sol. Jo. 758, distinguished.

(9) Hampden Settlement Trusts, Re, [1977] T.R. 177, considered.

(10) Londonderry's Settlement, In re, Peat v. Walsh, [1965] Ch. 918; [1964] 3 All E.R. 855; (1964), 108 Sol. Jo. 896, considered.

(11) Lowther v. Bentinck (1874), L.R. 19 Eq. 166, distinguished.

(12) N, In re, 1999 JLR 86, followed.

(13) Pilkington v. Inland Rev. Commrs., [1964] A.C. 612; [1962] 3 All E.R. 622; (1962), 106 Sol. Jo. 834; 40 T.C. 416; sub nom. Pilkington's Will Trusts, In re, [1962] T.R. 265; (1962) 41 A.T.C. 285, considered.

(14) Price, In re (1887), 34 Ch. D. 603, considered.

Additional cases cited by counsel:

Finers v. Miro, [1991] 1 W.L.R. 35.

Stuart, In re, Johnson v. Williams, [1940] 4 All E.R. 80.

West v. Lazard Bros. & Co. (Jersey) Ltd., 1993 JLR 165.

Text cited:

Goodhart, English Law & the Moral Law (1953).

Trusts—powers and duties of trustees—power of advancement—benefit of beneficiary—court to consider whether benefit in all circumstances of case to exercise power to reduce beneficiary's debt—may be so if enables full payment of debt—mere possibility of remainder of debt being forgone on part-payment not sufficient to amount to benefit—not benefit that cause of complaint against him reduced

Trusts—powers and duties of trustees—power of advancement—benefit to beneficiary—not benefit to improve moral or ethical position alone—not for trustee to determine moral obligations of adult beneficiary—debt incurred by fraud not different to any other

Trusts—powers and duties of trustees—power of advancement—benefit of beneficiary—not to distribute trust property to third party in payment of beneficiary's debt where minimal benefit to beneficiary and material disadvantage to other beneficiaries

Trusts—powers and duties of trustees—power of advancement—distribution against beneficiary's wishes—trustee may exercise power in favour of third party for beneficiary's benefit, against his express wishes, until renounces entire beneficial interest under trust

The trustee applied to the Royal Court for an order that funds in two trusts be distributed in payment of a debt owed by a beneficiary to a third party.

The first defendant owed the plaintiff company approximately US$687m., arising out of fraud on his part, and interest was accruing on this at a rate of US$55m. per annum. He had established two discretionary trusts worth approximately US$18m., of which he and the other defendants (his wife and son) were beneficiaries. The trust assets were composed in part of money, but also included three properties, including the homes of the second and third defendants. The only other funds available to the first defendant were contained in seven other trusts, with a combined capital of US$86m. The plaintiff was attempting, in related proceedings, to enforce a judgment for the debt, obtained in England, against the assets of these two trusts and was also attacking the other trusts in other jurisdictions. The trustee surrendered its discretion to the court and applied for an order that all or most of the trust funds be distributed to the plaintiff in reduction of the debt. The second and third defendants opposed the application. Before the Royal Court, evidence was produced of a letter from the first defendant to the trustees which indicated that he was strongly opposed to any distribution being made to the plaintiff.

In its judgment, the Royal Court declined to make any order for distribution out of the two trust funds to the first defendant for the purpose of reducing his debt to the plaintiff as (a) although the trustee could exercise the power of advancement against the express wishes of the first defendant; (b) such a distribution would not be for his benefit as it would result, proportionately, in only a very small reduction of his debt; and (c) even if it were for his benefit no payment should be made, as a payment would be to the detriment of the other beneficiaries. The proceedings in the Royal Court are reported at 2001 JLR 7.

On appeal against the Royal Court's second and third conclusions, the plaintiff submitted on the second conclusion that (a) a reduction of the first defendant's debt was to his benefit as (i) it would reduce the burdens to which he was exposed, and (ii) it would reduce the cause for complaint against him; (b) the only authority to the effect that the payment of an undischarged bankrupt's admitted lawful debts was of itself of no benefit to him, which had been relied on by the Royal Court, could be distinguished, as it did not concern the discharge of debts arising from fraudulent conduct; (c) there was a real and discernible benefit to the first defendant in being forced to confront his dishonesty and his moral and legal obligations; (d) the principle that it was not for a trustee to determine the moral obligations of an adult beneficiary was irrelevant due to the fraud of the first defendant; and (e) there were special features present in the case which had been wrongly disregarded, namely that the first defendant (i) was the primary beneficiary of the trust, and (ii) was the source of the settled property.

On appeal against the Royal Court's third conclusion, the plaintiff submitted that (a) the benefit to the first defendant would have been so substantial as to justify the distribution of the entire trust fund; (b) the court should not, as a consequence of the first defendant's fraud, have considered the needs of the other beneficiaries as the assets comprised in the trusts were primarily assets available to the first defendant; and (c) the court should have inferred that the defendants had further undisclosed assets available to them.

The second and third defendants appealed on a point of law against the conclusion of the Royal Court on the first issue submitting that (a) the principle that no man could be compelled to accept a gift applied equally to prevent a distribution being made out of a trust, by means of a payment to a third party for the benefit of a beneficiary, without his consent; and (b) the relevant clauses of the trust deeds precluded the exercise of the power in such circumstances.

Held, dismissing the appeals:

(1) The Royal Court was entitled to come to the conclusion that there was no benefit to the first defendant in the proportionately small reduction either of his indebtedness or of the complaint against him, as immediately after any distribution, the first defendant would still owe a huge amount to the plaintiff which he could not repay and there was no evidence whatsoever to suggest that a part payment might eventually lead to the matter being settled. The Royal Court was not, however, purporting to lay down a rigid rule that in no case could the reduction of a beneficiary's debts operate for his benefit. The correct approach was to consider all the circumstances of a case to decide whether, in fact, a mere reduction of a debt was to his benefit. The authority which the plaintiff sought to distinguish was merely regarded by the court as an occasion in which it was not ( paras. 38-39).

(2) The Royal Court was also entitled to conclude that an improvement in the first defendant's moral or ethical position would not be of benefit to him as it would not improve his material situation. Furthermore, even if it could be said that there was a notional benefit to him in being compelled to start towards moral regeneration, the fact that he had no perception of his obligations entitled the Royal Court to decide that no distribution should be made on this basis, as it was not for a trustee to determine the moral obligations of an adult beneficiary. Moreover, the fact that the debt arose out of fraud could not characterize a reduction of that debt as a benefit to a debtor in circumstances where it would not have been for the benefit of a non-fraudulent debtor ( paras. 40-43).

(3) The remaining "special features" identified by the plaintiff were not valid. The assertion that the fraud was perpetrated with the intention of obtaining an economic advantage for the trusts was not a legitimate factual assertion, as the proceedings were to be determined before the Royal Court on the assumption that the trusts were validly constituted. Moreover, the fact that the first defendant had historically been treated as the primary beneficiary of the two trusts, and was the settlor, was not a reason for regarding a distribution to the plaintiff as being for the benefit of the first defendant ( para. 44).

(4) The Royal Court was also entitled to come to its third conclusion as (a) the court, exercising the discretion of the trustee, had to balance the needs and...

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