Blessing applications: a new interventionism?

Abstract

The court’s traditional approach to applications by trustees to approve or ‘bless’ the exercise of their fiduciary discretions is one of judicial restraint, but in recent authority, there has been an increasing trend towards judicial intervention in the merits of the trustee’s decision. This article analyses that trend and considers how practitioners can maximise the prospects of successfully securing the court’s blessing for important trustee decisions.

INTRODUCTION

In relation to an application to the court by trustees to bless a momentous exercise of their fiduciary powers,¹ we are told by the learned editors of Lewin that, “[t]he court’s function… is a limited one”.² Whether the court agrees with the trustees’ proposed course of action is irrelevant: “[i]t does not withhold approval merely because it would not itself have exercised the power in the way proposed.” Rather, the blessing jurisdiction is concerned with “the limits of rationality and honesty.”³ In particular, the court will, or perhaps may,⁴ bless the proposed exercise of the trustees’ discretion if it is satisfied:

1. that the trustees had in fact formed the opinion that they should act in the particular way relevant to that case;

2. that the opinion of the trustees was one which a reasonable body of trustees properly instructed as to the meaning of the relevant clause could properly have arrived at; and

3. that the opinion was not vitiated by any conflict of interest under which any of the trustees was labouring.

This three-fold test, which derives from the leading case of Public Trustee v Cooper,⁵ has been approved by the Court of Appeal⁶ and by the courts of the major trust jurisdictions.⁷ While clearly reductivist,⁸ this test (which is referred to below simply as the ‘three-fold test’) is the traditional starting point for a trustee blessing application.

Thus, the orthodox approach is one of judicial restraint. The court is supposed to examine the propriety of the trustees’ process, and the rationality of the outcome of their deliberations, but should not (beyond those limits) impose its own view of the merits of the decision.

Given this judicial restraint, in theory, one might expect a blessing application to conform to the often-quoted view of Lindley LJ, that trustees can obtain the approval of the court with “ease and comparatively small expense”.⁹ Unfortunately, however, recent experience in practice suggests otherwise. On one view, the trend in recent authority—most strikingly in a series of decisions in the Royal Court of Jersey, but also apparent in England and in other jurisdictions—is that blessing orders have become harder for trustees to seek, more difficult to obtain, and more uncertain in their effect. Contested blessing applications have become commensurately more complex, expensive, and risky for the trustees and other fiduciaries who initiate them.

In this article, I explore this trend towards greater interventionism by the court and discuss how trustees who are considering bringing a blessing application can successfully navigate this more complex environment.

LIMB 1—MOMENTOUS DECISIONS

A blessing application can be made where “there is no real doubt as to the nature of the trustees’ powers and the trustees have decided how they want to exercise them but, because the decision is particularly momentous, the trustees wish to obtain the blessing of the court for the action on which they have resolved and which is within their powers.”¹⁰ Limb 1 of the three-fold test is thus that the court must be satisfied that “the trustees had in fact formed the opinion that they should act in the particular way relevant to that case”.

On its face, limb 1 is the most straightforward part of the three-fold test. The court will entertain an application to bless a momentous decision by the trustees. Conversely, if no sufficiently momentous decision has been made, it may refuse to hear the application at all.¹¹ What, then, constitutes a sufficiently momentous decision to invoke the blessing jurisdiction?

At risk of stating the obvious, the trustees must actually have made a decision capable of being blessed. But it is not a given that even this threshold will be crossed. In Re the AAA Children’s Trust,¹² the Royal Court of Guernsey heavily criticised trustees who had decided to sell a particular trust property, in circumstances in which the settlor had expressed (in memorable terms) the clear wish that it not be sold (“it is only to be sold in exceptional circumstances and then at an appropriately extraordinary price such that the news will reach him even in heaven”), and the sale was vehemently opposed by both the beneficiaries and the protectors. While the court went on to criticise the trustees’ (lack of) proper reasoning, the most fundamental problem was that it was unclear exactly how, and when, the trustees had even made the decision they were seeking to have blessed:

It is impossible to pinpoint a meeting of the Trustees at which the momentous decision the Court is asked to bless was taken. Instead, what emerged during the hearing of the Application and in particular during Advocate Newman’s closing submissions is that this was a rolling decision taken over a long period of time, discussed in telephone conversations… of which no file notes were created or, if they were recorded, they were not disclosed. It was also considered, he said, in a multitude of emails exchanged between them which, again, were not produced. Such a failure of disclosure is unforgivable….

In those circumstances, there was no “clear cut decision to accept the proposed offer, supported by a dossier of relevant factual information and fully recorded in a comprehensive minute of the Trustees’ deliberations”.¹³ The court’s trenchant criticism of the trustees’ failures in AAA Trust appear to have led—in Guernsey at least—to professional trustees being advised to take important decisions (in particular, decisions which may form the subject-matter of a future blessing application) at a formal meeting at which the trustees’ decision, and the reasons for it, is clearly and comprehensively minuted,¹⁴ and at which the factual basis for the decision is evidenced by a comprehensive “dossier of relevant factual material”. As one commentator (now a Commissioner of the Royal Court of Jersey) has said, that is no doubt sound advice.¹⁵

Even where there is a clear decision that the trustees are asking the court to bless, the court will only do so if it is sufficiently “momentous”. But what does that mean? When will a decision satisfy this threshold?

The OED defines “momentous” to mean “of great weight, consequence, or importance”. A momentous decision has also been described by the Jersey Court of Appeal as “a decision of real importance for the trust”.¹⁶ But these definitions hardly take the matter forward. For further clues, one must look at how the court approaches the blessing jurisdiction in practice.

Historically, the court has taken an accommodating approach. In any situation of genuine doubt or difficulty, the court would be there to assist the trustees. This is to be contrasted with the court’s approach to other fiduciary office-holders—in particular, the liquidators and administrators of insolvent companies. In the insolvency context, the court’s expectation has always been that responsibility to take the difficult decisions falls primarily on the office-holders themselves. As Neuberger J (as he then was) memorably put it:

a person appointed to act as an administrator may be called upon to make important and urgent decisions. He has a responsible and potentially demanding role. Commercial and administrative decisions are for him, and the court is not there to act as a sort of bomb shelter for him”.¹⁷

As to when any given trustee decision will satisfy the momentousness threshold: Lewin records various examples in the authorities of trustee decisions that the court has decided to bless, including “a decision to sell a family estate, to make a payment of trust moneys to a husband to fund his divorce settlement (and then remove the wife from the beneficiaries), to refuse to submit to the jurisdiction of a foreign court or provide information to parties to foreign divorce proceedings between the settlor and his spouse, to purchase the assets of the trusts in what might be construed as a self-dealing transaction, to make voluntary payments to a foreign revenue authority to settle disputed tax liabilities, to dispose of a controlling interest in a family company or to exercise a power of advancement by applying the bulk of the trust assets to charitable purposes at the request of the life tenant”.¹⁸ The learned editors also suggest that a variety of internal or external factors may raise the decision to the level of being ‘momentous’, including:

1. contention within the trust (ie, disagreement between the trustees);

2. contention amongst the beneficiaries; and

3. possible claims by third parties to the trust fund.

While the question whether a decision is “momentous” will, of course, always be fact-specific, it is possible to discern common threads in the authorities. Decisions found to be sufficiently momentous tend to involve one (or more) of the following three features:

1. High value: the decision involves assets of high value (whether in absolute terms, or in proportion to the trust fund), with the result that the trustees’ decision will have a major impact on the form or composition of the trust. The paradigm example would be a trustee’s decision to bring a sufficiently high-value trust¹⁹ to an end by distributing the entirety of the trust fund to a single beneficiary. Decisions which are momentous due to the value of the property involved may also include the sale of a family estate; the sale of a long-held family company; a major change in the composition of the trust’s assets or investments; or dealings with property that is of particular significance to the beneficiaries (eg, family heirlooms). Where the decision relates to property of very substantial value, even the decision to incur the legal and professional costs of drawing up a plan for the partition of the trust fund may, in itself, constitute a sufficiently momentous decision to be blessed by the court²⁰: an approach that provides the trustees, not merely with a “bomb shelter”, but with what I have described previously as a “sheltered walkway” to reach it.²¹

2. Contentious: the decision has generated a dispute, whether between the trustees and other fiduciaries; or between the trustees and the beneficiaries; or between various factions of the beneficiaries. Alternatively, the decision involves a determination of rights in contentious circumstances, such as a distribution to a beneficiary where there are potential third-party claims to the trust fund.

3. Unusual: the decision involves a marked departure from the normal course of administration of a trust: for example, adding new beneficiaries to the trust under an express power of addition, particularly where the trustee’s power to do so is challenged by the existing named beneficiaries.

The unifying theme is that the decision potentially exposes the trustee to claims by disappointed or aggrieved beneficiaries. The higher the value at stake as a result of the decision, or the more contentious or unusual its nature, the greater the risk of a subsequent complaint that the trustees’ decision was wrong. Thus, a decision is “momentous” when it gives rise to a sufficient risk of a subsequent breach of trust claim that it is reasonable and proportionate for the trustees to have the court resolve that issue in advance.

Of course, this does not mean that trustees apply for the court’s blessing solely in their own interests: where the decision is within this category, the consequences for the beneficiaries of the decision being taken incorrectly are sufficiently great that the court’s supervision is also warranted to safeguard their best interests. Where it comes to ensuring that a momentous decision has been taken in a proper fashion, the trustees’ desire to be protected from personal liability and the best interests of the beneficiaries will usually be aligned.

Recent authority suggests that the court may be increasingly willing to reject a blessing application in limine on the basis that the decision to be blessed is insufficiently momentous in nature. That happened in Re the Maram Trust,²² where the trustee²³ asked the court to bless a decision to change the proper law of the trust to Jersey law; add the settlor’s daughter to the class of beneficiaries; and to modernise the terms of the trust. The court declined to bless any of these decisions, saying that “it is obviously important that trustees are encouraged to take a realistic view of what can be described as ‘momentous’ and what trustees should regard as routine”²⁴.

A similar concern—albeit with a different result—was expressed by the Bailiff of Guernsey in Credit Suisse Trust Ltd v Haggiag:

In the present matter, the first question is whether this is a ‘momentous’ decision requiring the blessing of the Court. I am satisfied that any decision which may lead to the winding-up of a trust is by its very nature momentous for the trust concerned but it is a decision that a trustee would normally be able to decide for itself without resorting to the Court to obtain its blessing. The Court would be swamped if every such decision had to come before it. However, in the context of this Settlement where there have been a number of applications to the Court and a significant amount of litigation relating to the Settlement, it is understandable that the Applicant has chosen to seek the blessing of the Court. ²⁵

This observation is interesting. Taken literally, it might suggest that a decision that is inherently momentous (eg, a decision to wind up the trust) may nevertheless be too routinely momentous to justify invoking the blessing jurisdiction (do not trustees wind up trusts all the time?). But surely this is an oxymoron: a decision that one might expect trustees to take as a matter of routine is by its nature not momentous.

What the Bailiff’s remark might actually be getting at is that, in an era of squeezed resources, the court may adopt a less accommodating approach to trustee blessing applications generally. As insolvency liquidators and administrators are already aware, the extent to which the court is willing to act as a “bomb shelter” has more to do with the court’s policy in allocating its limited resources, than a legal issue (is this a momentous decision?) with an objectively right or wrong answer.

LIMB 2—THE RATIONALITY TEST

Rationality versus evaluation of the merits

The second limb of the three-fold test requires the court to be satisfied that “the opinion of the trustees was one which a reasonable body of trustees properly instructed as to the meaning of the relevant clause could properly have arrived at”. In relation to that limb of the test, Subair Williams J recently described the Court’s role as being “extraordinarily simple”:

I am to look at each objection individually and in the round before deciding whether to answer a binary question. Did the Trustees act irrationally or not? This case is not an invitation for the Court to chip in on its impressions and opinions on the best options available to the Trustees. The Court’s supervisory jurisdiction in the sense of a Category 2 Public Trustee v Cooper application imposes an obligation on the Court to ‘bless’ the decisions of the Trustees unless they have acted unreasonably or unlawfully or have relied on improper or irrational factors.²⁶

While the test is concerned with the “limits of rationality and honesty”, in practice the court’s evaluation of whether a particular course of action is ‘rational’ will inevitably be bound up with its own view of the merits of the decision, as demonstrated by several recent decisions of the Royal Court of Jersey.

In Representation of Paicolex Trust Management AG; Re the R, Q, and P Trusts,²⁷ the trustees asked for approval of their decision to remove the settlor from the class of Excluded Persons (ie, to add him to the beneficial class), on the basis, inter alia, that it may in the future be tax efficient for trust funds to be distributed to the settlor for the purpose of him conferring a benefit on his children (the existing beneficiaries of the trust). In relation to that application, the Court insisted that it receive detailed further submissions on the possible restructuring options that would be followed by the trustee before blessing the decision to make any distribution to the settlor. As the Court put it, “we did not just wish to approve stage 1 without seeing and approving stages 2, 3 and 4. On the facts of this case, it was not enough for us to accept the principle of flexibility for tax planning without understanding how that flexibility would work in practice and blessing the same.”

Before the court would consider blessing the inclusion of the settlor in the beneficial class—on its face, and in the circumstances of that case, a seemingly rational and sensible step for the trustees to take—it wanted to know what the trustees were going to do next. The court’s ultimate decision whether to bless the inclusion of the settlor as a beneficiary would therefore ultimately turn, not on the rationality of that step, but on whether it was content with the trustees’ broader plans for the trust.

In Representation of Ocorian Private Trustees (Jersey) Limited; Re the Y, W, V and U Trusts,²⁸ the trustees sought the court’s blessing of a decision to distribute all the assets of the trust in accordance with the provisions of a ‘Revised Distribution Plan’. Mid-way through the hearing, it became clear that the court would refuse to bless the trustees’ decision on the basis that the way the trustees had treated the writing-off of the loss on the sale of a property in France (the ‘French Write Off’) had been (in the court’s view) “wrong in principle”. Given the court’s objection, “there seemed little point in hearing further detailed submissions on other matters”.

The court’s problem with the trustees’ treatment of the French Write-Off was that it treated the loss on the disposal of the property as being effectively borne by all the beneficiaries equally, whereas the property had been purchased in the names of, and belonged beneficially to, the Second Respondent only. The trustees justified the write-off on the basis that “it was only for French tax reasons that the company owning the French Property was beneficially owned by the Second and Third Respondents. Other than for those reasons, the Trustees would have owned the company in question themselves. Accordingly, the loss should be split between all the beneficiaries.” The court’s view was that, because the property had been transferred to the Second Respondent, and she would have had the benefit of any profit on the disposal of the property, the loss ought to fall on her share²⁹.

The problem with this approach is that it is difficult to say that the trustees’ approach to the French Write-Off was irrational. The trustee had formed the view that the purchase of the French property by the Second Respondent was a matter of tax efficiency only; as a result, they considered that it would be unfair for the Second Respondent effectively to bear the loss on the disposal of the property. One might rationally take a different view—that the transaction having been structured by way of an acquisition by the Second Respondent herself, she would thereafter take the gains or losses that arose—but that is quintessentially a value judgment for the trustees in the exercise of their dispositive discretion. In concluding that this judgment was “wrong in principle”, the court effectively declined to bless the trustees’ own view of what would constitute a fair division of the trust fund.

It is possible for these decisions simply to be viewed as applications of the traditional three-fold test—cases in which the trustees have, or may, stray outside the bounds of rational decision-making. But arguably they also reveal a broader trend of direct judicial engagement with the substantive merits of the trustees’ decision.

The need for “full and frank disclosure”

Another area in which this trend is evident is in the requirement that, in seeking a blessing, the trustees make “full and frank disclosure” to the court. It has always been the case that the trustees must provide the court with proper information regarding the circumstances in which they have taken their decision,³⁰ and the reasons for it—indeed, a blessing order gives the trustees protection only to the extent of the material they have disclosed.³¹ But in recent authorities, the question whether the court has been put in possession of all relevant information has taken on an increasingly prominent role, leading to the adjournment or dismissal of several blessing applications.

A notable example of this was Tamlin v Edgar,³² in which the trustees made an unopposed application to distribute the assets of two trusts to one of the beneficiaries; on the first occasion, the application was adjourned and the trustees were required to adduce further evidence; the order was then made on the second occasion, but the Chancellor was at pains to point out that, even on an unopposed blessing application, the court does not act as a “rubber stamp”:

The very fact that the decision of the trustees is momentous, taking that word from the description of the second category, and that the decision is that of the trustees, not of the court, makes it all the more important that the court is put in possession of all relevant facts so that it may be satisfied that the decision of the trustees is both proper and for the benefit of the appointees and advancees. It is not enough that they were within the class of beneficiary and the relevant disposition within the scope of the power. It must be demonstrated that the exercise of their discretion is untainted by any collateral purpose such as might engage the doctrine misleadingly called a fraud on the power. They must satisfy the court that they considered and properly considered their proposals to be for the benefit of the advancees or appointees. All this requires the full and frank disclosure to the court of all relevant facts and documents. The court is not a rubber stamp and parties and their advisors must be astute not to appear to treat them as such.³³

In recent cases, the requirement for “full and frank disclosure” has on occasion become another mechanism by which—whether consciously or not—the court brings to bear its own view of the merits of the trustees’ decision. That has again been particularly evident in Jersey.

The focal point is generally tax. Thus, in Re Piedmont and Riviera Trusts,³⁴ the trustees initially made a “two-stage” blessing application, seeking (in the first instance) a blessing of their decision as to the percentage split between the beneficiaries, but contemplating a further application to bless a partition of the trust fund in accordance with those percentages once the tax position of the individual beneficiaries had been considered in further detail.³⁵ The court indicated, however, that it was “not happy at being asked to bless an appointment where the Trustees had not taken UK tax advice on the effect of the proposed appointments and where the tax consequences to the UK beneficiaries were unclear,”³⁶ and it adjourned the application, effectively compelling the trustees to obtain UK tax advice as to the tax consequences of distributions to UK resident beneficiaries.

Naturally, if the trustees have simply failed to consider the tax consequences of their proposed course of action at all, it may be impossible for the court to satisfy itself that the decision was one that was open to a rational trustee. But even where tax advice has been taken, the court may refuse to bless the trustees’ decision if the tax advice is missing some feature which the court considers to be material to the trustees’ decision. See in this regard:

• Jemma Trust Company Ltd v B: The trustees’ application for approval of its decision to sell a property was refused, partly on the basis of their conflict of interests, but also on the basis “[p]erhaps most significantly for the purposes of this decision, there is no analysis in the tax advice put before the Court of the extent to which, if at all, any of the parties to the present litigation would potentially carry responsibility for the tax consequences facing the Trust and the Representor.”³⁷ The context of that remark was that there was some doubt as to whether the trustee had acted negligently in holding the property directly, when holding it via an intermediate company may have avoided certain UK tax liabilities, but in the context of the trustee’s application to approve the sale of the property, the trustee’s liability for breach of trust in having held the property directly was not itself in issue on the application. Rather, it appears that the court was unhappy with the idea that the property be sold in circumstances in which the question of the trustees’ share of culpability for the tax incurred was unresolved.

• Representation of X Trustees Limited, Re D and E Trusts: Despite the trustee having taken, “extensive tax advice”, the court refused to bless its decision to resolve outstanding tax liabilities and to distribute the trust fund equally between four of the trusts’ beneficiaries. The application was rejected in part because of “the failure by the X Trustees to consider a worst-case scenario in relation to the tax liabilities. Given that a higher tax liability could have disadvantaged one beneficiary more than the others the Trustee should have identified the potential maximum quantum and considered what impact that might have on the Step Plan”.³⁸ Again, since the trustees had taken the decision to distribute the trust fund equally between the beneficiaries, it seems that the court was unhappy with that approach, since (in a “worst-case” tax scenario) it may have “short-changed” certain of those beneficiaries.

Each of Piedmont, Jemma, and X Trustees may simply represent a (justifiable) conclusion by the court that the trustee has failed to take into account some aspect of the tax consequences of its decision which any reasonable trustee would have taken into account. Yet in each case, albeit in quite different circumstances, the court’s conclusion appears (at least in part) to have been informed by its own view of merits of the trustees’ underlying decision.

LIMB 3—CONFLICTS, UNFITNESS, AND NON-BINDING GUIDANCE

Managing conflicts—increased judicial scrutiny

The third limb of the three-fold test is that the trustees’ decision “was not vitiated by any conflict of interest under which any of the trustees was labouring”. But the mere existence of a conflict of interests does not automatically prevent trustees from invoking the blessing jurisdiction. Indeed, in Public Trustee v Cooper itself, Hart J made it clear that a blessing application was one of the means by which trustees may respond to a conflict of interests: in some cases, the trustees should resign; in others, the conflict is so pervasive that they should surrender their discretion; but in a third class of cases:

the trustees may honestly and reasonably believe that, notwithstanding a conflict affecting one or more of their number, they are nevertheless able fairly and reasonably to take the decision. In this third case, it will usually be prudent, if time allows, for the trustees to allow their proposed exercise of discretion to be scrutinised in advance by the court, in proceedings in which any opposing beneficial interests are properly represented, and for them not to proceed unless and until the court has authorised them to do so. If they do not do so, they run the risk of having to justify the exercise of their discretion in subsequent hostile litigation and then satisfy the court that their decision was not only one which any reasonable body of trustees might have taken but was also one that had not in fact been influenced by the conflict.

Trustees who are subject to a conflict of duties, or a conflict of interests, can thus invoke the blessing jurisdiction so that the court can scrutinise their decision, ensuring that it has been taken fairly and properly notwithstanding the conflict. But recent authorities in England and Jersey show a trend towards increasingly stringent scrutiny.

In Representation of Hawksford Jersey Limited; Re H Trust,³⁹ the court refused to bless the trustees’ decision to sell the trust’s sole asset (a London property held via a holding company). However, the trustee was subject to a conflict of interests in respect of the sale because the sale would generate liquidity sufficient to pay its outstanding trustee fees of some £120,000. The trustees’ evidence did not mention the conflict or indicate how it had been managed in taking the decision to sell the property. The Royal Court of Jersey considered this to be fatal to the blessing application:

where there is a conflict of interest and a trustee subsequently seeks the blessing of the Court to the decision which it has taken, it is of fundamental importance that the trustee address the conflict issue and be seen to do so. Thus, in the present case, we would have expected to have seen minutes in which, when reaching its decision, the Trustee acknowledged the existence of the conflict but went on to explain why, despite the conflict, it was nevertheless in the interests of the beneficiaries/trust estate that the Property be sold…

Where there is a conflict of interest, the Court will give heightened scrutiny to the decision for which approval is sought. We are not to be taken as laying down a rule that, where a conflict of interest has not been acknowledged and disclosed, the Court will invariably refuse its approval. The decision may be so obviously appropriate that the Court should nevertheless approve it. However, failure to disclose and acknowledge a conflict of interest when reaching a decision, is likely to make it much more difficult for the Court to be satisfied that the decision has not in fact been influenced by the conflict.⁴⁰

In X Trustees, the trustees did disclose their potential conflict of interests (that the decision was to put into effect a Settlement Agreement involving the trustees’ own interests). But that was insufficient. The court said that, while the conflict was not sufficiently pervasive to require the trustee to surrender its discretion, “it should have set out its reasons why the alleged conflict did not exist, supported if necessary by advice that the mutual obligations in the Settlement Agreement had fallen away and, if they had not, explain why, notwithstanding the existence of a conflict, it was nevertheless in the interests of the beneficiaries to reach the in- principle decision”.⁴¹

In Schumacher v Clarke,⁴² Chief Master Marsh refused to bless the trustees’ decision to implement part of a Settlement Agreement in respect of a dispute over the division of the estate of the late Zaha Hadid. In part, that was on the basis that the court had “concerns both about the process that the trustees have adopted in reaching their decisions and the manner in which conflicts of interest have been managed”. In short, the trustees had “achieved a compromise package that accommodates their strongly held views. However, it appears to be much closer to the compromise of a dispute than being the fruit of proper engagement between fiduciaries”.⁴³ That was, again, notwithstanding the fact that the trustees had disclosed the existence of the conflict—unfortunately, the court found that the trustees’ assertion that the conflict had been appropriately managed was “impossible to accept”.

The following principles can be extracted:

1. While a blessing application is a possible means of managing a conflict of interests, the court will apply a regime of heightened scrutiny to any decision involving an actual or potential conflict.

2. The first step is for the trustees to acknowledge and disclose the conflict. A failure to do so is likely to result in the blessing application being dismissed unless the trustees’ decision is so evidently correct that it can nevertheless be blessed (but in that case, is the decision sufficiently momentous to warrant the court’s intervention at all?).

3. The trustees must do more than merely disclose the existence of the conflict. They must provide evidence explaining how, in taking their decision, they have managed the conflict, and why—notwithstanding the conflict—they consider their decision to be in the interests of the beneficiaries. The trustees can expect the court to approach that evidence with a healthy degree of scepticism.

Unfitness, loss of trust and confidence, and “non-binding guidance”

In Jones v Firkin-Flood,⁴⁴ the court refused a blessing application on the basis, inter alia, that the trustees were unfit to act as such. Briggs J (as he then was) said that,

it seems to me that the relatively limited role which the court has hitherto chosen to adopt in category (2) cases (within the Public Trustee v. Cooper analysis) may well have been developed in the context of decisions by trustees whose general fitness was not in dispute. For that reason I would add to the category of cases in which the court may feel insufficiently certain about the propriety of a proposed discretionary decision that it declines to bless it, without at the same time prohibiting it, a case just like the present, where the trustees have demonstrated a general unfitness to act, by conduct prior to the taking of the decision in question.⁴⁵

This principle does not fit easily into the traditional three-fold test. While it is obvious how a conflict of interest may vitiate the trustee’s decision-making process—because the decision itself may have been taken in the trustees’ own interests—a decision taken by trustees who have otherwise shown themselves to be unfit is not necessarily irrational or improper because of the general failings or inadequacy of the trustees themselves. A deficient decision-maker does not necessarily make for a deficient decision.

In Jones v Firkin-Flood itself, the trustees’ demonstrable unfitness to act led the court to remove them from office. In that context, its refusal to bless their decision is hardly surprising. But what if the alleged unfitness of the trustees is less clear-cut?

In Re the Bell Trust,⁴⁶ one group of beneficiaries sought to remove the Protector of a series of Jersey and Guernsey law trusts from office on the grounds of an alleged loss of trust and confidence (the trustee of the Jersey trusts had already agreed to resign once a restructuring of the trusts had been completed). The removal proceedings were stayed on the basis that the trustee intended to develop proposals to partition the trusts, which would resolve the underlying dispute. However, in light of the allegations of loss of trust and confidence that had been levelled at the fiduciaries, in its judgment, the court made a series of observations on “[the] principles, to which this Court would have regard if asked to approve a momentous decision by the Trustees by which the SG Trusts are restructured.”⁴⁷

Thus, the interesting position that reached in the Bell Trust case was that the court did not finally determine the claim to remove the trustees or the protector from office. Instead, it directed that the trustees proceed with their plan to partition the trusts, which would come before the court on a blessing application, but sought to give what it called “non-binding guidance” as to how the fiduciaries might approach the exercise of their discretion.

The provision of such non-binding guidance is difficult to reconcile with the traditional three-fold test. A blessing application is, “not an invitation for the Court to chip in on its impressions and opinions on the best options available to the Trustees”⁴⁸: in guiding the trustees to (or, at least, towards) a particular conclusion, the court is necessarily moving beyond the traditional limits of the jurisdiction and is influencing the content of the trustees’ decision itself.

In the Bell Trust case, the Court’s decision to give non-binding guidance to the fiduciaries was challenged on appeal. The appeal was dismissed largely on procedural grounds, such that the Court’s decision to give non-binding guidance stood. However, the Jersey Court of Appeal added a note of caution to its judgment, stating that nothing it had said “should be interpreted as an encouragement to first instance judges either to depart from the non-intervention principle or to express provisional views as to the substantive content of any possible restructuring in the generality of cases.”⁴⁹ After that hardly ringing endorsement, the non-binding guidance provided by the Royal Court⁵⁰ ended up being heavily caveated:

• The process which has been adopted in this case is unusual but it has been designed to assist in the objective of an equitable and efficient restructuring in the particular circumstances of this case.

• What is said in this judgment should be considered by all parties but especially the Trustees and the Protector whose decision it is ultimately to make as regards the restructuring which will be put before the Court for a Re S blessing; but what is said is not binding upon them. It is open to the Trustees or the Protector to reach a decision inconsistent with this guidance.

• As with all decision-taking which comes under review in a court of law, the reasons for it will be scrutinised, and it would not be surprising if one or more parties raised questions thereafter if this guidance is not followed. That does not mean that the decision, if contrary to the guidance, would necessarily not be blessed—there may be a change of circumstances between now and then, or there may be a demonstrable misunderstanding in the Court’s judgment today; or the Trustees’ decision, though not in accordance with the guidance, nonetheless falls within the parameters of reasonable decision-taking which, following the approach in Re S, the Court is obliged to bless.⁵¹

Thus, the trustees and protector in the Bell Trust matter were told by the Court that they need not follow the Court’s guidance, and that even if they did follow the guidance, it did not necessarily guarantee a successful blessing application!

In that context, it is an understatement to say that the status of “non-binding guidance” dispensed by the Court is far from clear. But whether the Court’s increased interventionism in relation to the merits of the trustee’s decision-making is a good or bad development is a different matter. In practice, it is not uncommon for trust disputes to reach court in the form of a contested claim to remove the trustees, or as a claim for breach of trust, when the underlying problems facing the trust could be resolved much more efficiently and effectively via an exercise of the trustees’ powers (so as, eg, to enable warring beneficiaries to go their separate ways). In such cases, the court’s creative exercise of its supervisory jurisdiction—permitting a blessing application to proceed but giving early and proactive guidance to address allegations of unfitness or loss of trust and confidence—may be a pragmatic means of securing the best outcome in the circumstances. Nevertheless, the giving of non-binding guidance is undoubtedly a novelty and represents a far more interventionist approach to the blessing jurisdiction than has previously been contemplated. If, and how, this jurisdiction develops remains to be seen.

THE EFFECT OF A BLESSING ORDER

In addition to the increased difficulties in obtaining a blessing order outlined above, the recent decision of the Court of Appeal in Denaxe Ltd v Cooper⁵² has cast some doubt on the effect of a blessing order, once it has been obtained.

In Denaxe, equitable receivers obtained an order blessing their decision to sell Blackpool Football Club and its stadium, in order to satisfy a judgment which a minority shareholder had obtained against the club’s former owner and his company, Denaxe Ltd. In blessing that decision, the court held that the price obtained by the receivers was reasonable. After the sale was completed, Denaxe sued the receiver, arguing that the sale of the club had been at an undervalue. Denaxe had not been joined as a party to the blessing proceedings, but at first instance, Fancourt J held that its claim against the receivers was barred by the blessing order. While the Court of Appeal agreed, its analysis of the nature and effect of a blessing order is striking and, for trustees, potentially concerning.

First, the court held that the “immunity” obtained by trustees and other fiduciaries from a blessing order is, in reality, an application of the broader principles of res judicata and abuse of process:

the concept of "immunity" flowing from an approval decision is most easily understood as judicial shorthand for the bar on subsequent proceedings that results from an issue estoppel. Although it is not entirely apposite to speak in terms of the applicant trustees or office-holders having a "cause of action" when making an approval application, the essence of the point is that if the judge hearing the approval application determines a particular issue as a step in deciding to give his approval, that will operate as a bar to a party to the application (or one of their privies) seeking to relitigate that issue in subsequent proceedings against the trustees or office-holder.⁵³

The court therefore indicated that the question of “immunity” really depended on which parties were before the court, and whether they had had an opportunity to raise the claim which they were now seeking to pursue. If “whether because of shortage of time or because it would be impracticable, trustees or office-holders do not seek to bind interested parties by joining them as parties or by the appointment of representative respondents, then I cannot see how they could obtain “immunity” from subsequent claims in any substantive sense.”⁵⁴ However, because Denaxe had had an opportunity to raise its claim that the sale of the club was at an undervalue, it would have been an abuse of process for it to be permitted to do so in the subsequent proceedings, and the court’s decision to strike out its claim was therefore upheld on appeal.

This underscores the crucial importance of ensuring that, on a blessing application, all parties potentially affected by a trustees’ decision are joined or appropriately represented. If a party able to sue a trustee for breach of trust is not joined to, or represented in, a blessing application, the protection afforded by a blessing order will be seriously undermined.

The other striking aspect of the Court of Appeal’s judgment is the assertion that the subject-matter, and therefore the effect, of a blessing order will be fact specific:

• At paragraphs [129]–[131] of the judgment, Snowden LJ (giving the principal judgment of the court), held that, “the court's willingness to entertain a particular application for approval and the issues that it may be prepared to determine will vary from case to case”. He then drew a distinction between an application seeking a ruling that “the trustees were acting honestly and rationally in deciding to enter into a transaction”, which would protect the trustees “against a subsequent claim to set aside the transaction and for any consequential relief on the basis that they were not exercising their powers honestly or rationally in the best interests of the beneficiaries”, and an application seeking a decision as to, “whether trustees had reached a decision to sell an asset in accordance with their equitable duty of care”, which the court would be “even more cautious” about determining.

• In her short concurring remarks, at paragraph [171], Asplin LJ added that, “[a]s Snowden LJ points out, one size does not fit all. There is a wide spectrum of applications which may be made by trustees or office-holders and the nature of the approval they seek will vary. Inevitably, the factual background of each application will be different. It follows that the nature of any immunity which may arise is highly fact sensitive and must be considered with some care. There is no single answer to the question of whether subsequent proceedings will be barred.”

Given the traditional manner in which a blessing order is framed, these remarks are troubling. A blessing order does not traditionally differentiate the potential causes of action that may have been available to the beneficiaries. As traditionally understood, an order blessing the sale of a particular asset does not merely bless the trustees’ decision to sell the asset as an honest and rational decision, while leaving open the issue whether, in doing so, the trustees are acting with reasonable care. Rather, it simply approves the trustees’ decision to sell the asset, with the order then barring any subsequent complaint that the sale constituted a breach of trust.

In light of this aspect of the Denaxe decision, there is new uncertainty as to the effect of what might be termed a ‘vanilla’ blessing order, that is an order which simply states that the court approves a given decision of trustees. The practical means of dealing with this uncertainty may be informed by the postscript to Snowden LJ’s judgment:

As a postscript I should add that much of the difficulty in this case could have been avoided if, in the context of what was hotly contested litigation, Marcus Smith J had been invited to give more detailed consideration to the question of the consequences that would flow from his decision on the Sanction Application.

That would have reflected the reality that the whole purpose of trustees or other applicants in seeking the approval of the court is to obtain some measure of protection from subsequent complaints by interested parties. The court hearing an approval application is plainly not required actually to decide in advance precisely what immunity will flow from a decision to approve the transaction. However, identifying as clearly as possible the issues which the court is deciding and following that through by identifying specifically the type of claims that would or would not be barred, would, in my view, be a helpful exercise.

The court appears to have had in mind that a blessing order ought to be framed in terms of the types of claims that it does, and does not, bar, or at least that the court’s judgment accompanying the blessing order would do so. Of course, the need for that level of particularity will increase the burden on the trustees seeking the blessing order (and their legal advisers), whose responsibility it will be to frame the protection conferred by the blessing order. That also leads to the risk that claims will “slip through the net” of the blessing order, if it is not framed appropriately.

CONCLUSION

In an era of increasing judicial interventionism and uncertainty, the blessing jurisdiction nevertheless remains of crucial importance to trustees. Without the court’s protection, major decisions in the life of a trust may expose the trustees, or their insurers, to significant liability. And where the beneficiaries are at war, and it is impossible to please everybody (or even anybody), a blessing application may be the only viable means of avoiding allegations of breach of trust.

The practical lesson for trustees and their advisers is that, in this new climate, every aspect of the blessing application process will require even greater care and attention:

• The decision to be blessed should be identified with particularity. When was it taken? What were the trustees’ reasons? Ideally, a formal board minute or record of the decision, clearly and comprehensively recording the reasons for the decision, will be produced. Trustees may also consider compiling a Guernsey-style “dossier” of the factual information on which the decision has been based.

• The evidence and submissions in support of the blessing application should set out why the decision is momentous in the circumstances of this particular trust. Is it a high-value decision? Is there contention? What unusual features justify the application to court?

• The trustees should consider whether the decision raises issues on which professional input may assist—for example, tax, actuarial, or accounting advice. If it does, a proactive approach to obtaining that advice may be warranted. The advice may also need to be interrogated—where is it incomplete or unclear?—and analysed—how does it affect the trustees’ decision?

• Any conflicts of interest or conflicts of duty should be identified via the trustees’ own process. It is not enough for conflicts to be disclosed and discussed by counsel at the blessing hearing—the trustees’ own record of its decision, and its evidence in support of the application, should identify all potential conflicts, indicate how they have been and are being managed, and explain why the trustees’ consider that they can take the decision and why, in their view, the decision is in the best interests of the beneficiaries.

• Careful thought must be given to the protection sought via the blessing order. Representation orders are crucial: without all interested parties formally represented, the blessing order may be ineffective to protect the trustees. The application should also be framed to ensure that the trustees obtain effective protection. For example, is the court asked to bless the trustees’ decision to sell a trust asset, or to sell it at a specified price; if the latter, is the court being asked to determine that it would be reasonable for the trustees to sell at that price? Thought must be given to what specific future claims might arise, and the order tailored to ensure that the blessing order protects the trustees.

With careful planning and preparation, the blessing jurisdiction may still provide trustees with a “bomb shelter” capable of withstanding any attack.

Author Biography

Andrew Holden is a barrister practising from XXIV Old Buildings, Lincoln’s Inn, London. He specialises in international trust litigation as part of his commercial chancery practice.

Footnotes

Author notes