Removal of trustees and other fiduciaries: practice and recent case-law Jonathan Hilliard Wilberforce Chambers

Why does it matter? Need to know legal position if relationship turns sour May not necessarily want to go immediately / in short term- may be good reasons not to Need to know when should go Need to know costs position in these situations May be application to remove someone else involved in the trust

How much can we get from the cases? Not much detailed guidance Often deal with lay trustees Often deal with fixed interest trusts But considerable number in last 5 years that start to provide more detailed guidance…  

The guiding light The welfare of the beneficiaries and the competent administration of the trust English position: Letterstedt v Broers (1884) 9 AC 371 Same in Jersey: Eiro v Equinox Trustees Ltd [2006] JRC 119; Representation of the Jeep Trust [2010] JRC 075 But what does this mean in practice?

What breaches of trust will lead to removal? Just deliberate breaches? No- Jones v Firkin-Flood [2008] EWHC 2417 (Ch) at [283]-[285] Any breach of trust? No- Kain v Hutton [2007] NZCA 199 at [267]: “Merely showing breaches of trust would not necessarily be sufficient to justify removal of trustees. This would depend on the gravity and nature of the breaches and the particular circumstances of the trust and the trustees, including the level of culpability of the trustees – see Letterstedt v Broers (1884) 9 App Cas 371 at 385 - 386 (PC) per Lord Blackburn. To allow trustees to be removed for relatively inconsequential mistakes would be to usurp the settlor’s wishes in entrusting the assets to the trustees.”

What breaches of trust will lead to removal? So minor breaches / other lapses won’t themselves be fatal: e.g. Kershaw v Miclkethwaite [2010] EWHC 506 (Ch) at [22] e.g. aggressive tone in correspondence- Jones at [288] Test is whether it endangers the trust property or shows a want of honest, proper capacity to execute the trust duties and/or a want of reasonable fidelity

But what where there the relationship has broken down (even without a breach of trust)? Point of departure is Letterstedt at 386: “[T]hough it should appear that the charges of misconduct were either not made out, or were greatly exaggerated, so that the trustee was justified in resisting them, and the Court might consider that in awarding costs, yet if satisfied that the continuance of the trustee would prevent the trust being properly executed, the trustee might be removed. It must always be borne in mind that trustees exist for the benefit of those to whom the creator of the trust has given the trust estate.” (emphasis added) When will this be the case?  

But what where there the relationship has broken down (even without a breach of trust)? Letterstedt goes on (386-7): “…if it appears clear that the continuance of the trustee would be detrimental to the execution of the trust, even if for no other reason that human infirmity would prevent those beneficially interested, or those who act for them, from working in harmony with the trustee, and if there is no reason to the contrary in the intentions of the framer of the trust to give this trustee a benefit or otherwise, the trustee is always advised by his own counsel to resign, and does so. If, without any reasonable ground, he refused to do so, it seems to their Lordships that the Court might think it proper to remove him…their main guide must be welfare of the beneficiaries”

But what where there the relationship has broken down (even without a breach of trust)? Similarly, Williams Mortimer & Sunnucks (quoted with approval in Heyman v Dobson [2007] EWH 3503 (Ch) at [22]: “In particular, if the administration has come to a standstill because relations between the personal representatives have broken down or relations between the representatives and beneficiaries have broken down, the court will ordinarily remove the personal representatives and appoint new ones to enable the administration to be completed. It is not necessary to establish wrong-doing or fault by the personal representative to obtain its removal. If for whatever reason such as clash of personalities or the lack of confidence in the personal representatives by the beneficiaries, even if unjustified, it has become impossible or difficult for the administration to be completed by an existing personal representative, then an order for his removal will usually be made.”

A difficulty… What if only some of the beneficiaries are complaining? What does Letterstedt tell us here: Where all living beneficiaries complain? Where all adult beneficiaries complain? Where some adult beneficiaries complain?

When is friction / hostility enough then? Letterstedt (at 389):   “It is quite true that friction or hostility between trustees and the immediate possessor of the trust estate is not of itself a reason for the removal of the trustees. But where the hostility is grounded on the mode in which the trust has been administered, and if it has been caused wholly or partly by substantial overcharges against the trust estate, it is certainly not to be disregarded.”

When is friction / hostility enough then? Amplified in Kershaw v Micklethwaite [2010] EWHC 506 (Ch) at [11] (Newey J):   “I do not think that friction or hostility between an executor and a beneficiary will, of itself, be a good reason for removing the executor. On the other hand, a breakdown in relations between an executor and a beneficiary will be a factor to take into account, in the exercise of the court’s discretion, if it is obstructing the administration of the estate, or even sometimes if it is capable of doing so. “ (Compare test in Kain v Hutton [2007] NZCA 199 at [267])

When is friction / hostility enough then? So concluded in that case (at [28]): “While, though, it may well be that the administration of the estate could be carried out more quickly and cheaply were Mr Kershaw and his sisters to be on good terms, I do not think that the potential problems are such as to warrant the executors’ removal. As I see it, the poor relations between the parties need not and should not prevent or impede substantially the administration of the estate.”

When is friction / hostility enough then? How does the Court guard against beneficiaries generating the friction to bring about removal? Alkin v Raymond [2010] WTLR 1117: where source of friction is the beneficiary, need to show more than this, namely that impeding trust administration and interest of beneficiaries if source is a discretionary beneficiary, take account of the fact that he is just a discretionary beneficiary and not someone with a fixed interest

When is friction / hostility enough then? Final point: Court looking at welfare of beneficiaries of a trust. Not looking at whether those people would be better off if they owned the assets personally: Isaac v Isaac (No.2) [2005] EWHC 435 (Ch) at [68]: “Lewin stresses ‘the welfare of the beneficiaries’. But in this case it is not really in their capacity as beneficiaries of the family trusts that the claimants are dissatisfied with their welfare. What they are dissatisfied about is that they are not getting the advantages which they would like to get through personally owning substantial shareholdings in RGBH. What they want is for the company to be sold to a takeover bidder like Travis Perkins, so that they will receive large capital sums for their shares.”

The lessons to draw on hostility / friction Court likely to ask (whether it adverts to it or not) How seriously does this affect the running of the trust? Who is responsible for the hostility / friction? Is there a justifiction for it? (see e.g. Kershaw) Which beneficiaries are for and against removal? Any particular reasons not to remove / not to remove yet? The costs of having a new trustee

What if the request to retire comes when the trustee is in the middle of an important task? Examples The difficulty here The guidance from In the Matter of the A Trust [2012] JRC 066 The lessons to draw from the case

Conflict cases In the Matter of the E, L, O and R Trusts [2008] JRC 150 If clear conflict, resign? But differing views from beneficiaries does not itself mean there is a conflict

The costs of removal applications The particular importance of costs here What if the allegations of wrongdoing fail but the Court says that the trustee should go because of the breakdown of the relationship? Letterstedt What if you settle part way through a removal application? Isaac v Isaac (No.2) [2005] EWHC 435 (Ch); E, L, O and R Trusts [2008] JRC 150 Standard or indemnity costs if you lose?

The trustee’s options Guidance from E, L, O and R Trusts [2008] JRC 150: “41. We would not wish our judgment in this case to be taken as support for the proposition that a trustee must retire immediately upon being requested to do so and that it will be deprived of its costs if it seeks the directions of the Court before agreeing to retire.  That is most definitely not the case.  Our decision in this case is based upon the fact that the conflict of interest referred to by the beneficiaries was as plain as could be and it was thoroughly unreasonable of the trustee not to recognise that it was in an impossible position and had no option but to retire. 42. In many cases the position will be far less clear.  There may be any number of reasons for tension to have arisen between a trustee and the beneficiaries and it will often be entirely reasonable for a trustee to seek a decision from the Court before agreeing to retire or to oppose any application for removal.  In many cases, even where the Court's decision is that the trustee should retire or be removed, the Court will not conclude that the trustee has acted in such a way that it should be deprived it of its costs or remuneration.  Everything will depend upon the facts of the specific case but the general approach remains that a trustee which is acting in good faith in what it perceives to be the best interests of the trust and the beneficiaries as a whole will not be deprived of its costs unless it has behaved unreasonably.  That includes differences over whether the trustee should continue in office or not.”

The trustee’s options Can seek Court directions in cases of serious doubt Don’t be afraid of staying (at least for a time) if you think there is a good reason to do so? The importance of taking an early decision about what to do Canvas views of beneficiaries? If decide to go at a certain point in the future (e.g. after transaction completed), say so openly? Keeping the temperature as low as possible

Power-holders other than the trustee Same general approach (as long as the person is a fiduciary)? Kershaw v Mickelthwaite [2010] EWHC 506 (Ch) at [9] But differences in practice to the position of a professional trustee The choice of the fiduciary: Kershaw; Alkin v Raymond [2010] WTLR 1117 Greater possibility where lay person that takes wrong view of their role The limits of the jurisdiction to remove other power holders Jurisdiction to remove fiduciaries: Re Freiburg Trust [2004] JRC 056 What about other power-holders?

Who has the power to remove the trustee? The importance of the point What if the trustee wants to go but the protector won’t exercise the power?

And finally… Keeping one eye on what will happen after you retire What can be done in this regard?

Thank you for listening