In an important judgment, the Deputy Bailiff of the Royal Court of Jersey has clarified the Jersey law position in relation to two points. Firstly, whether the object of a mere power has standing to sue for breach of trust against trustees. Secondly, whether the principle of 'reflective loss' is directly applicable to a discretionary trust which wholly owns a company.
THE OBJECT OF A MERE POWER
The application in the present case was a strike out application by Ansbacher Trustees (Jersey) Limited against the Plaintiffs, Sarah Daile Freeman, Robert Keith Freeman and Rosanna Freeman. The order of justice claimed several causes of action for breach of trust and negligence.
The Deputy Bailiff found that the first two plaintiffs' claims were statutorily time barred by Article 57(2) (b) of the Trusts (Jersey) Law 1984 (as amended). The plaintiffs had been adults at all material time and had knowledge of the occurrence of the alleged breaches of trust for more than three years before the order of the justice was served. They were therefore removed from the action.
Rosanna's claim however was not time barred because she was a minor for part of the period when the Plaintiffs had the relevant knowledge. The argument was that she was unable to bring a claim for breach of trust against the Trustees, being the object of a mere power to appoint capital and income and the mere power to distribute income. She also had a contingent interest, being named as a beneficiary of the ultimate default trust which arose at the end of the trust period.
The Deputy Bailiff accepted that the position in English law as stated in Lewin was equally applicable in Jersey law, namely that the object of a fiduciary power (whether a trust power or a mere power) has locus standi to apply to the Court for relief. Further that such relief can include the reconstitution of the trust fund where loss has been caused by a trustee's breach of trust. The Deputy Bailiff also decided that a person with a contingent interest had locus standi to bring an action for breach of trust. In the circumstances of the object of either a mere power or a contingent interest claiming reconstitution of the trust fund following a breach of trust, it would be a matter of discretion for the Court as to what relief, if any, should be granted in any particular case.
THE PRINCIPLE OF REFLECTIVE LOSS
The second point of some importance was the question of whether the principle of reflective loss (the Foss v Harbottle principle) applied to a discretionary trust. The reflective loss principle is that the proper plaintiff in respect of loss suffered by a company is the company itself and not its shareholders. The Deputy Bailiff affirmed that the principle undoubtedly forms part of Jersey law (eg Khan v Leisure Enterprises Limited [1997] JLR 313). As such, he was able to look to English precedent in the absence of Jersey authority.
In Ansbacher, certain investments in land and software made by a company (wholly owned by the discretionary trust) were said to be in breach of trust. The losses were those of the company although the order of justice sought the reconstitution of the trust fund for the breaches of trust.
The Deputy Bailiff conducted a review of the relevant English authorities which importantly did not have any discretionary trust element to them. The only fiduciary relationships considered in the English authorities were those of a director and the company and of a bare trust. If the Deputy Bailiff was to accept that the Foss v Harbottle principle applied in the present case, the order of justice should be struck out. He was unconvinced however that the principle should be applied to a situation involving a discretionary trust. Even if that were to be the case in England, there were strong grounds for believing that Jersey law should follow a different path.
The Court concluded that it was strongly arguable that the Foss v Harbottle principle did not apply in the present case. In doing so, the Deputy Bailiff distinguished the situation of a company and a discretionary trust. The rationale behind the reflective loss principle is to prevent double recovery and to ensure that monies are returned to the company in order not to prejudice creditors of that company. Neither of the two rationales are applicable to a discretionary trust situation where the plaintiff claims a breach of trust and a reconstitution of the trust fund. The Court in deciding upon a remedy can be flexible and can order the trustees to reimburse the company directly or use the funds to acquire new shares in the company. In this way, there can be no risk of double recovery because the company will have been reimbursed. Secondly, there can be no prejudice to investors because they are in the same position as they were prior to the wrongful investments which gave rise to the breaches of trust.
On a purely practical level, if the reflective loss principle applied to a discretionary trust a beneficiary would be unable to sue for a breach of trust if the losses were those of a company. It is not unusual for Jersey trustees to be the trustees of discretionary trust which wholly owns a company. The directors of that company are often the same individuals as the trustees. If that company makes the investments on behalf of the trust fund and makes losses then the losses are the company's. The beneficiaries would be unable to sue the trustees for breaches of trust because the company had lost money. The beneficiaries would also be unable to sue the directors because the directors owed the beneficiaries no duties as directors. The beneficiaries would (one imagines) have to take steps to remove the trustees due to an obvious conflict of interest if they refused to take the necessary action against the company directors (which in all likelihood would be the same individuals).
The Deputy Bailiff concluded that although such options were available that it would not reflect well on the law or on Jersey as a trust administration centre if the beneficiaries had to go through such hoops unless absolutely unavoidable.
In reliance upon the above points the Deputy Bailiff found it was strongly arguable that the principle of reflective loss had no application where a discretionary beneficiary is seeking reconstitution of the trust fund because of a failure by the trustee to supervise the investments of a wholly owned company.
CONCLUSION PRACTICAL POINTS FOR TRUSTEES TO CONSIDER FOLLOWING ANSBACHER
Once again the Jersey Court has applied the spirit of the principles expressed in authorities such as Schmidt v Rosewood in emphasising the importance of the Court's supervisory jurisdiction over trusts and trustees. It is not surprising that in the circumstances of loss said to be caused to the trust fund by a breach of trust that the Court is loathed to strike out the application in its entirety.
Importantly trustees need to be aware that the three year limitation period is not necessarily taken from the date of knowledge of the adult beneficiaries as Ansbacher confirmed that the object of a contingent interest and mere power can sue for breach of trust. Objects of such interests in the context of discretionary trusts will often be minors and will therefore extend the limitation period for such actions.
Furthermore, although not conclusive on the point of reflective loss, the Deputy Bailiff has given strong arguments for this point to succeed at a final hearing. This emphasises the principles expressed in Barlett v Barclays Bank Trust Company Ltd of the importance of the duties of trustees to supervise the affairs of a company of which they are the controlling shareholders.
The judgment reinforces the regulatory guidance of the importance of exercising management and control over a company of which trustees are the controlling shareholders, particularly if trustees are also the directors of such a company. To not do so could be ultimately costly from a regulatory as well as a legal perspective.
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