Bermuda: Transfer Of Trusteeship - Discussion Paper & Case Summary

Last Updated: 6 January 2015
Article by Ashley Fife

INTRODUCTION

Transfer of trusteeship often raises challenging issues for trustees. This paper explores the approach taken by courts in Bermuda and other jurisdictions in connection with the following issues and questions:

  • The consequences and remedies when a trustee's appointment is invalid
  • Is the power to appoint trustees always a fiduciary power?
  • Improper exercise of the power to remove and appoint trustees
  • The tension between the outgoing trustee's duty to transfer trust property and records verses its entitlement to security for its fees and liabilities
  • When outgoing trustees may have personal liability for liabilities that exceed the value of the trust fund

The discussion paper uses a case study as a basis for exploration of the issues and to limit the scope of the paper. However, the intention is that, if need be, each part and section of the discussion paper may be referred to without having considered the case study in detail. Lists of cases with brief summaries, sections of legislation referred to and texts are provided at the end of the paper.

This is a rapidly developing area of the law and many cases turn on specific facts and differing judicial views. Accordingly, in each case, it is prudent to consider the specific facts and issues carefully and obtain advice as appropriate.

CASE STUDY: "POPEYE AND THE SINKING TRUST"

Spinach Unlimited, a BVI company controlled by Popeye, is the named settlor of the Sinking Trust, a discretionary trust established in 2004 governed by Bermuda law (Trust). Spinach Unlimited has the power to remove and appoint trustees.

Popeye's wife, Olive Oyl, and their children, are the Trust's beneficiaries. Dark & Stormy Trustees (Bermuda) Ltd (D&S Trustees) was appointed as trustee in 2008 when Harold Hamgravy, the original trustee, retired.

THE TRUST FUND

Assets:

  • All the shares in Toot Toot Ltd, a BVI company.
  • Unsecured loans of USD1.5 million owed by Spinach Unlimited (Spinach Loans Receivable).
  • A portfolio of equity investments valued at about USD2 million (Portfolio), managed by Gonzalo Investments Ltd in Miami, the relationship manager being Popeye's good friend, Mr William J. Wimpey.

Liabilities:

  • Toot Toot Ltd has made undocumented, unsecured loans of USD3 million plus interest to D&S Trustees over the years to help fund distributions, loans to Spinach Unlimited, and trustee fees and expenses (Toot Toot Loans Payable).
  • D&S Trustees has USD40,000 in outstanding trustee fees. Popeye disputes the level of the fees.

Toot Toot Ltd

  • In 2008, Popeye settled the entire share capital of Toot Toot Ltd into the Trust.
  • In 2010, Toot Toot Ltd took out a large bank loan to buy a yacht, the Sea Hag. In 2012, the Sea Hag sank off St George's, in Bermuda. Toot Toot Ltd was unable to recover a significant portion of its losses from its insurers.
  • In June 2014, Toot Toot Ltd was placed into insolvent liquidation. Mr Brutus is the appointed liquidator.

The SAR

In January 2014, D&S Trustees discovered Popeye had been indicted in the US for tax fraud and racketeering.

D&S Trustees' subsequently received repeated requests from Popeye to transfer funds into an account Spinach Unlimited has in South America. D&S Trustees considered it was unable to act upon Popeye's requests and was reluctant to communicate with Popeye for fear of tipping him off about the suspicious activity report it filed.

The Deed of Removal

In March 2014, D&S Trustees received a Deed of Removal executed by Spinach Unlimited to remove D&S Trustees and appoint as trustees Sweet Private Trust Company Ltd (Sweet PTC), a Bahamian private trust company.

Sweet PTC'S Demands

Later in March 2014, Sweet PTC wrote to D&S Trustees and insisted D&S Trustees urgently:

  • transfer the Trust records and the Trust assets to Sweet PTC;
  • provide explanations regarding a number of transactions; and
  • provide copies of legal advice that D&S Trustees obtained in connection with a production order procured by the US Government under a TIEA.

D&S Trustees' Requests for Security

In late April 2014, in response to Sweet PTC's demands, D&S Trustees:

  • told Sweet PTC to seek explanations of the Trust related transactions from Popeye;
  • insisted that its fees be paid before it transfers any assets, records or provides any detailed explanations;
  • requested Spinach Unlimited, the Trust's beneficiaries and Sweet PTC to release D&S Trustees from any claims they have against D&S Trustees in connection with the Trust; and
  • stated it intended to retain the entire trust fund as security because it was concerned it may incur tax liabilities or costs in connection with further production orders.

Sweet PTC promptly responded and:

  • asserted that D&S Trustees had produced no evidence of any potential tax liabilities;
  • offered D&S Trustees an indemnity limited to the trust fund; and
  • proposed that an amount be held in escrow pending determination of D&S Trustees' fees.

It's a long way to the ocean floor...

On 25 October 2014, D&S Trustees received:

  • a letter from the former trustee, Harold Hamgravy, advising that Spinach Unlimited had been struck off the BVI Company Register at the time Spinach Unlimited executed the deed to appoint D&S Trustees in place of Harold Hamgravy; and
  • a notice of claim from Mr Brutus claiming repayment of the Toot Toot Loans Payable.

PART 1 - INVALID APPOINTMENT OF TRUSTEES

Consequences of invalid appointments of trustees

If D&S Trustees' appointment was invalid, since 2008 it may have been dealing with the trust fund without the necessary authority (i.e. as a de facto trustee). This may bring into question its entitlement for all the fees it has charged and reimbursement for all the liabilities it has incurred, while purporting to act as trustee.

Harold Hamgravy may remain appointed as trustee and exposed for any losses caused to the trust fund by D&S Trustees' acts or omissions.

Section 23(a) of Bermuda's Limitation Act 1984 provides inter alia that no period of limitation shall apply to a beneficiary for actions against the trustee:

  • for fraudulent breach of trust; or
  • to recover trust property or its proceeds in the trustee's possession or converted to its use.

Aside from the above, section 23(3) of the Act provides inter alia the limitation period for breach of trust in Bermuda is 6 years from the date the right of action accrued.

Harold Hamgravy distributed the trust fund to D&S Trustees during 2008. It may be that the limitation period for a breach of trust claim against Harold Hamgravy has expired. However, Harold Hamgravy remains appointed as trustee and it may be argued that Harold Hamgravy's breach is viewed as an on-going breach and that the limitation period has not expired.

Purported exercise of powers by a struck off company's directors

Are there any quirks in BVI company law which may be relevant to the issue of the validity of D&S Trustees' purported appointment by Spinach Unlimited at a time when Spinach Unlimited was struck off the BVI company register?

Section 215 of the BVI Business Companies Act 2004 provides that when a BVI company is struck off, neither the company, nor any directors, may:

  • act in any way with respect to the assets or affairs of the company; or
  • claim any right for, or in the name of, the company.

However, if a BVI company has been struck off only for non-payment of annual government fees, the company may be restored to the company register within 10 years and, once restored, section 217 of the Act deems the company to have never been struck off the register.

Perhaps the consequence is that, upon Spinach Unlimited's restoration to the BVI Company Register, D&S Trustees' appointment will be treated as having always been valid.

However, if Spinach Unlimited was, for example, a Bermuda company, or a UK company, the position would be different. Reinstatement to the company register in those jurisdictions does not result in companies being treated as though they had always been on the relevant company register, in which case D&S Trustees' appointment would likely remain invalid.

What remedies are available for invalid appointments?

In a Jersey case of In the matter of the D Retirement Benefit Trust [2011] JLR 672, former directors of a UK company which had the power to appoint trustees, but had been dissolved, executed deeds to purportedly appoint trustees on the company's behalf:

  • On one occasion, to replace a retiring trustee; and
  • On another occasion, to appoint additional trustees.

Both appointments and the retirement were invalid. Consequently, the persons who had purportedly been appointed as trustees were considered to be acting as de facto trustees (or trustees de son tort) and the trustee who considered it had retired (by a deed of retirement and appointment) remained appointed as trustee. The de facto trustees and the outgoing trustee applied to the Court seeking remedies including:

  • an order confirming the validity of the appointment of the (de facto) trustees or, alternatively, formally appointing the de facto trustees as trustees of the trust;
  • ratification of the transactions implemented by the de facto trustees;
  • rectification of the deed of retirement and appointment of trustees;
  • relief of the outgoing trustees and the de facto trustees from liability in connection with the invalid deeds which had purported to effect the retirement and appointments as trustees; and
  • approval of the outgoing trustee's fees.
  • The Court exercised its statutory powers and inherent jurisdiction to formally appoint the persons who had been acting as de facto trustees. In addition, the Court ratified the actions of the de facto trustees:
  • because the Court determined the de facto trustees had acted in good faith and were unaware that they had not been properly appointed; and
  • to save the trust from the havoc that might ensue from any attempt to unscramble what had been done by the de facto trustees.

The Court's ratification preserved the beneficiaries' rights to bring claims against the de facto trustees for breaches of trust other than those arising out of the invalid appointments.

The remedy of ratification made available In the matter of D Retirement Benefit Trust may represent another pragmatic "get of jail free card" for trustees. This pragmatism may be reminiscent of the remedy offered by the (pre UK Supreme Court Pitt v Holt and Futter and Futter) application of Re Hastings Bass and its statutory equivalents such as Bermuda's new Section 47A of the Trustee Act 1975 introduced during 2014. Francis Tregear QC, in his article Putting it right: remedying problems arising from defective trustee appointment (in Trust and Trustees, February 2013) makes the following comments regarding the decision In the matter of D Retirement Benefit Trust:

  • The matter was not argued out adversarially as all parties sought ratification. Accordingly, care may need to be taken before placing great weight on the decision.
  • The Jersey Court appeared to rely primarily on the Court's inherent jurisdiction as a basis for granting the remedy of ratification. However, UK courts (including the Privy Council) may not necessarily take as pragmatic or wide a view as offshore courts regarding the availability of the court's inherent jurisdiction as a basis for ratification.
  • The wide jurisdiction offered by Section 47 of Bermuda's Trustee Act 1975 may enable the court to provide the trustees the power (once formally appointed) to ratify the transactions carried out by such trustees during the period that they had not been properly appointed.

Section 47 has become well known as a unique feature of Bermuda's trust law not offered in other jurisdictions. It has been used extensively for a variety of purposes to permit transactions not authorised by the trust deed (and to vary trust deeds) without consent of all of the beneficiaries in circumstances where a transaction is in the interests of the beneficiaries as a whole (or in the interests of one or more beneficiaries but of neutral impact on others).

In the matter of the D Retirement Benefit Trust, the Court also determined that the de facto trustees had acted honestly and reasonably and ought to fairly be relieved from liability. D&S Trustees and Harold Hamgravy may consider applying for such a remedy. The Bermuda Court has power to relieve trustees from liability under section 52 Trustee Act 1975 and as part of its inherent supervisory jurisdiction.

As an alternative to ratification, In the matter of D Retirement Benefit Trust the parties also sought rectification of the deed of retirement and appointment. The advantage of rectification was that it would have retrospective application so that the de facto trustees would be treated as though they had always been properly appointed and the retiring trustee's retirement effective. The arguments in favour of rectification were that:

  • as the company had been dissolved, there was no one else who had the power under the trust deed to appoint trustees and therefore the outgoing trustee had the statutory power of appointment; and
  • when it executed the deed, the outgoing trustee intended to divest itself of the office of trustee in favour of the incoming trustee.
  • Rectification is a discretionary remedy of the court exercising its equitable jurisdiction. In order to grant the order of rectification, the Court determined it needed to be satisfied that:
  • as a result of a genuine mistake the deed of retirement and appointment did not reflect the true intention of the parties; and
  • there was no other practical remedy.

The argument for rectification failed because the:

  • outgoing trustee did not know it had the statutory power to appoint trustees at the time the deed was executed, therefore it could not have had the intention to itself appoint the new trustee; and
  • Court was prepared to grant the remedy of ratification.

Do trustees have a duty to investigate capacity of their appointor?

Given the potential ramifications of an invalid appointment, should there be a duty on trustees to ensure that the person exercising the power to appoint trustees has capacity? Is it prudent for trustees to:

  • obtain due diligence such as certificates of good standing?; or
  • perform company searches on companies that are purporting to exercise a power to remove or appoint trustees?

In the matter of the D Retirement Benefit Trust, prior to its execution of the deeds, the directors of the (dissolved) company's holding company had mentioned to the outgoing trustee that the holding company was in the final stages of liquidation. However, the Court nevertheless determined that, as the outgoing trustee had acted honestly and in good faith, it was entitled to rely on the deed purportedly executed by the company under seal as a representation from the (dissolved) company's former directors that the company had capacity to enter the deed.

To read this Paper in full, please click here.

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