Richard & Others v. The Hon AB Mackay & Others

Trust Law International, vol. 11 (1997)

Judgment

MILLETT J: This is a summons taken out by the trustees of a settlement made on 2nd April 1965 by Lord Tanlaw. The trustees seek a direction that they may be at liberty, if in the exercise of their discretion they think fit, to exercise a power vested in them by a deed of re-appointment made on 31st March 1981 by applying assets not exceeding l million in value, being or part of the capital of a share of the first defendant, and assets of a similar value, part of the capital of a share of the second defendant, for the benefit of those defendants by transferring the sums raised to the trustees of a new settlement which it is proposed should be made by Lord Tanlaw in Bermuda.

The settlor, Lord Tanlaw, is the third son of the second Earl of Inchcape. The second Earl married twice. By his second marriage he married Leonora Margaret Brooke, the oldest of three daughters of the last Rajah of Sarawak. The settlor himself also married twice, and by his second marriage he married a Malaysian lady by whom he has two children aged six and five, the first and second defendants.

The trusts of the deed of re-appointment are essentially accumulation and maintenance trusts for the defendants, future children of the settlor and their issue, contingently on attaining twenty-five. There are remoter beneficiaries in the event of all principal beneficiaries dying under twenty-five. The settlement has a worldwide power of investment. There is a wide power of advancement which extends to the whole of the trust funds, which could be advanced in favour of any single beneficiary for his benefit. The trust fund is presently worth some 7 million. It is invested widely throughout the world: there are holdings in the United States, Germany, Switzerland and Australia as well as the United Kingdom.

The proposal is to raise a total of 2 million, of which half would be raised now, out of a holding of American dollars and, I think, some shares in a German bank. The balance may be raised if some woodlands in the United Kingdom are sold. They are expected to fetch some 2 million, and it is the present intention to raise half of that sum and transfer that as a second tranche to the trusts of the proposed Bermudan settlement.

The evidence of the trustees sets out the history of the family. It discloses significant connections with the Far East. The family remain substantial shareholders of the Inchcape group of companies. Lord Tanlaw himself has been a director of Inchcape plc since 1967, and was managing director from 1967 to 1971. The family have very substantial overseas connections, particularly in the Far East. Lord Tanlaw himself established a Sarawak foundation. Lord and Lady Tanlaw visit the Far East frequently, often with their children. They maintain their links with Lady Tanlaw's family and with Sarawak. Lord Tanlaw was president of the Sarawak Association from 1972 to 1975; he is a member of the Oriental Club in London; he has extensive business interests overseas, including interests in Singapore, the United States and Australia, and he and Lady Tanlaw jointly own a farm in Australia. The Trustees have deposed to their opinion that it is clearly possible, and indeed likely, that, in view of their overseas connections, family, historic and commercial, the defendants will spend considerable periods overseas, and there is a real possibility that at some stage one or both of them may decide to settle abroad. There is also a considerable possibility that, in the event of the early death of Lord Tanlaw, Lady Tanlaw would decide to live in the Far East with her children, the first two defendants.

In those circumstances the trustees have deposed that they consider it would be advantageous, particularly to the principal direct beneficiaries, if a proportion of the trust fund were to be transferred to a new overseas settlement, and to that end they have caused a draft of the proposed new settlement to be prepared. The settlement reproduces, with only minor alterations, the main beneficial and administrative provisions of the existing settlement and the 1981 reappointment. There is no immediate tax liability which it is desired to avoid. The main object of the proposal is not to gain a tax advantage but to obtain greater flexibility and diversification with the concomitant additional protection to the trust estate which would result from spreading the risks by hiving off up to 25 per cent of the trust fund and -causing it to be subject to an overseas settlement.

The trustees have pointed out that, although they can now freely send funds to the Far East, to do so has only been possible since the abolition of exchange control and might

no longer be feasible if there were a change in economic conditions that required the introduction of exchange control or if, for any other reason, the export of funds became impossible. They have chosen Bermuda as the seat of the new settlement rather than Malaysia, Sarawak or Hong Kong, or anywhere else in the Far East, largely because of the advantages that Bermuda offers in the way of stability coupled with an English system of law and the presence of very experienced corporate trustees.

In Re Whitehead's Will Trusts [1971] 1 WLR 833 Sir John Pennycuick, the Vice-Chancellor, was asked to declare that an appointment of foreign trustees of an English trust was effective to discharge the English trustees.

At page 837 he said:

'... the law has been quite well established for upwards of a century that there is no absolute bar to the appointment of persons resident abroad as trustees of an English trust. I say 'no absolute bar', in the sense that such an appointment would be prohibited by law and would consequently be invalid. On the other hand, apart from exceptional circumstances, it is not proper to make such an appointment, that is to say, the court would not, apart from exceptional circumstances, make such an appointment; nor would it be right for the donees of the power to make such an appointment out of court. If they did, presumably the court would be likely to interfere at the instance of the beneficiaries. There do, however, exist exceptional circumstances in which such an appointment can properly be made. The most obvious exceptional circumstances are those in which the beneficiaries have settled permanently in some country outside the United Kingdom and what is proposed to be done is to appoint new trustees in that country. In those exceptional circumstances it has, I believe, almost uniformly been accepted as the law that trustees in the country where the beneficiaries have settled can properly be appointed.'

At page 838 the learned Vice-Chancellor added:

'... It cannot, I think, make any difference whether the court is asked under the Act of 1958 to transfer a fund to a new settlement in a foreign country or whether one is concerned merely with the appointment of new trustees of the existing settlement.'

This is not a case where the family concerned or the beneficiaries have become resident abroad. The settlor and his two children live in England. Nor is it a case where the proposed new settlement is to be formed in the country where the beneficiaries reside or may be expected to reside in the future. The possibility which is envisaged is that they may well wish to live in the Far East, whereas the seat of the proposed settlement is to be Bermuda.

But in my judgment the language of Sir John Pennycuick, which is narrowly drawn, is too restrictive for the circumstance of the present day if, at least, it is intended to lay down any rule of practice. Nor in my view is it accurate to equate the approach that the court adopts to the exercise of its own discretion with the approach it adopts when asked to authorise the trustees to exercise theirs.

Where the court is invited to exercise an original discretion of its own, whether by appointing trustees under the Trustee Act 1925 or by approving a scheme under the Variation of Trust Act 1958, or where the trustees surrender their discretion to the court, the court will require to be satisfied that the discretion should be exercised in the manner proposed. The applicants must make out a positive case for the exercise of the discretion, and the court is unlikely to assist them where the scheme is nothing more than a device to avoid tax and has no other advantages of any kind.

Where, however, the transaction is proposed to be carried out by the trustees in exercise of their own discretion, entirely out of court, the trustees retaining their discretion and merely seeking the authorisation of the court for their own protection, then in my judgment the question that the court asks itself is quite different. It is concerned to ensure that the proposed exercise of the trustees' power is lawful and within the power and that it does not infringe the trustees' duty to act as ordinary, reasonable and prudent trustees might act, but it requires only to be satisfied that the trustees can properly form the view that the proposed transaction is for the benefit of beneficiaries or the trust estate.

In Re K, McKinnon v Stringer [1927] VLR 66, Mr Justice Mann explained the reasons for the disinclination of the court, when called on to exercise its own discretion, to sanction the appointment of trustees out of the jurisdiction. He said this:

"... As I understand it, the basis of the disinclination of the court to sanction the appointment of trustees who are out of the jurisdiction is a disinclination to do that which might put it out of the power of the court to protect the interest of persons who are within the jurisdiction. But where, as here, there are no beneficiaries within the jurisdiction, and where the trustees whom it is desired to appoint are resident in a British community where, for all practical purposes, similar laws are administered under a system similar to that which obtains in this country, with courts available for the correction of errors, as in this country, it seems to me that there is no reason at all why the authority necessary should not readily be given."

The learned judge identified the two relevant considerations: first that the proposed transaction should not put the trust funds at risk or deprive the beneficiaries of appropriate protection from a court armed with the necessary powers; and secondly that the transfer of funds or the appointment of foreign trustees is appropriate.

It must be borne in mind that one consequence of authorising the trustees to exercise a power is to deprive the beneficiaries of any opportunity of alleging that it constitutes a breach of trust and seeking compensation for any loss which may flow from that wrong. Accordingly, the court will act with caution in such a case when evaluating the possibility of risk and it will need to be satisfied that the proposed transaction is not imprudent. But the appropriateness of the transaction is essentially for the trustees to decide, and different minds may have different views on what is appropriate in particular circumstances. Certainly in the conditions of today, when one can have an international family with international interests, and where they are as likely to choose one jurisdiction as another for the investment of their capital, I doubt that the language of Sir John Pennycuick is really in tune with the times. In my judgment, where the trustees retain their discretion, as they do in the present case, the court should need to be satisfied only that the proposed transaction is not so inappropriate that no reasonable trustee could entertain it.

I have evidence before me that the proposed trustee is the leading trustee corporation in Bermuda, that the trust law of Bermuda is similar to and based upon and derived from English law, and that there are no restrictions upon the free movement of capital. I think I can take judicial notice of the fact that Bermuda has a stable regime within the United States sphere of influence and that many wealthy families, acting in their own interests and in a businesslike way, have been in the habit in recent years of entrusting substantial portions of their fortunes to trustees in that jurisdiction.

There are obvious potential advantages in diversification. What is proposed is only the removal from the jurisdiction of 25 per cent of a very substantial fund. There is great force in the submission that what is proposed is positively a prudent step, and I have no doubt at all that it cannot possibly be stigmatised as imprudent or unreasonable.

So far as the appropriateness of what is proposed is concerned, as I have already indicated the family have a strong connection with the Far East; there is a considerable likelihood that the children, when they grow up, may wish to live or make the basis of their careers in the Far East; and to have some proportion at least of the trust funds out of the United Kingdom in an appropriate but stable area may properly be considered to be to their advantage.

Accordingly I consider that there is no reason why the trustees should not take the view that the proposed transaction is for the benefit of the principal beneficiaries, and I will give the direction sought. I should add that on matters of detail there have been slight amendments to the proposed settlement in Bermuda which now satisfy me that there are sufficient safeguards in the selection of future trustees, and I shall direct the trustees to bring into chambers a fresh exhibited settlement which includes those amendments as well as other minor amendments to clerical errors which have crept into the present draft.

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