The Esteem Settlement and The No. 52 Trust

CourtRoyal Court
JudgeBirt, Deputy Bailiff and Jurats de Veulle and Rumfitt
Judgment Date09 January 2001
Neutral Citation[2001] J.Unrep 5
Date09 January 2001
Birt, Deputy Bailiff and Jurats de Veulle and Rumfitt

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) 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.

(2) C.L., In re, [1969] 1 Ch. 587; [1968] 1 All E.R. 1104; sub nom. L., In re, (1968), 112 Sol. Jo. 254, followed.

(3) 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.

(4) Clore's Settlement Trusts, In re, [1966] 1W.L.R. 955; [1966] 2 All E.R. 272; (1966), 110 Sol. Jo. 252, considered.

(5) 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.

(6) Duncan v. Elkins (1946), 45 A.2d. 297, considered.

(7) Golder v. Société des Magasins Concorde Ltd., 1967 J.J. 721.

(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, dictum of Walton, J. applied.

(10) Inglewood (Lord) v. Inland Rev. Commrs., [1983] 1 W.L.R. 366; [1983] STC 133; (1982), 127 Sol. Jo. 89.

(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.

(15) Townson v. Tickell (1819), 3 B. & Ald. 31; 106 E.R. 575, not followed.

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

Additional cases cited by counsel:

Alsop Wilkinson v. Neary, [1996] 1 W.L.R. 1220.

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

Gibbs v. Rea, [1998] A.C. 786 ([1998] UKPC 3).

T's Settlement Trusts, In re, [1964] Ch. 158.

Trusts—powers and duties of trustees—power of advancement—distribution against beneficiary's wishes—trustee cannot force direct gift upon beneficiary—may make indirect gift to third party for beneficiary's benefit, even if beneficiary positively objects, but power to be used rarely

Trusts—powers and duties of trustees—power of advancement—benefit of beneficiary—distribution only to be made where for beneficiary's benefit—to consider whether trustee's proposals to deal with capital for beneficiary's benefit and whether he genuinely believes that for beneficiary's benefit

Trusts—powers and duties of trustees—power of advancement—benefit of beneficiary—mere reduction of beneficiary's debt not necessarily benefit—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—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

The trustee applied 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. 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.

The trustee submitted that (a) while it was true that a direct gift could not be forced upon a beneficiary, this principle did not apply to an indirect gift and any distinction between the two was restricted to cases where an intended donee had ceased to be a beneficiary under a trust; (b) a distribution should be made in this case as (i) any reduction in the debt would be to the first defendant's benefit, (ii) the debt had arisen through his fraud and, although he might not agree, it would clearly be to his benefit if part-payment were made to the victim of the fraud, and (iii) part-payment might result in the plaintiff desisting in its efforts to obtain any further moneys from the first defendant and thus result in a benefit to him; and (c) a number of equitable maxims operated in favour of a distribution.

The second and third defendants submitted in reply that (a) a distribution could not be made contrary to the first defendant's objections, on the grounds that no-one could be compelled to accept a gift against his wishes, and although a distribution might be made where the beneficiary had not consented, it could not be made where he had positively objected; (b) for these purposes, no distinction was to be made between a direct and an indirect gift; (c) a distribution of the trust assets would be of no benefit to the first defendant as it only amounted to four months' interest on the debt, and he would therefore be in no better position after a distribution and a mere reduction of a debt could not, of itself, be a benefit to him; and (d) the fact that the debt had been incurred as a result of fraud did not mean that it was for the first defendant's benefit that it be paid off, as the law did not differentiate between different debts on grounds of morality and it was not for the trustee to impose his sense of morality upon a legally competent beneficiary.

The court considered: (a) whether a distribution could be made against the wishes of the first defendant; (b) on the facts of the case, would a distribution be of benefit to him; and (c) if so, should the court exercise its discretion to make such a payment For these purposes the court treated itself as if it were the trustee, with the ensuing powers and duties.

Held, declining to make any distribution from the trust funds:

(1) It was accepted that, in any context, a man could not be forced to accept a direct gift but the same principle did not apply to an indirect gift. Making such a distinction was logical as an indirect gift required no act of concurrence by the beneficiary. For the purposes of an indirect gift, no distinction was to be drawn between a beneficiary who did not consent to an advancement and one who positively objected to one, and although the cases where a trustee would exercise the power of advancement against the express wishes of a beneficiary would be relatively few, there was a power to do so. The objections of the first defendant were no bar to the trustee's exercising the appropriate powers in the trust deeds ( paras. 38-40).

(2) The court would not, however, order a distribution in this case. The power of advancement was only to be used where it would be for the benefit of a beneficiary, and, for these purposes, benefit was to be construed widely as encompassing more than mere financial benefit. A two-stage test was involved. First, there was an objective test: could the way in which the trustee proposed to deal with the capital fairly be regarded as being for the benefit of the beneficiary Secondly, a subjective test: did the trustee genuinely believe that the appointment of capital would in fact be for the beneficiary's benefit Most importantly, the question had to be considered in a realistic and commonsense manner rather than in a theoretical or academic way ( para. 48).

(3) A distribution in this case would not be for the first defendant's benefit. First, there was no benefit in any real sense in financial terms. The total trust assets amounted to a mere four months' interest on the debt and a reduction of the liability by making a distribution would have no effect on the first defendant's day-to-day position or his ability to support himself and his family. Even if the assets of the other seven trusts were similarly distributed, the debt owed would still total US$583m. The mere reduction of this debt was not of itself, therefore, a benefit to him. The position would be different if the distribution allowed him to pay off the whole debt, but he was clearly insolvent and in no position to do so. Secondly, it made no difference that the debt had been incurred by fraud, since part payment of a debt had exactly the same effect however the debt had been incurred. Furthermore, it was an important principle that a trustee ought not to be able to impose his sense of morality upon an adult beneficiary. Thirdly, the question of whether a proportionately small reduction of the first defendant's debt would be of benefit to him could not be determined by the application of equitable maxims, but was simply one of the court putting itself in the position of the trustee and assessing the particular facts of the case. Finally, there was no evidence that part payment would result in the plaintiff...

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