Challenging a trustee’s decision
At the heart of many trust disputes lies a dissatisfied beneficiary who objects to the decision the trustees have either already taken or indicated they are about to take.
Unsurprisingly, challenges to trustees’ decisions often become acrimonious and can evolve into claims for breach of trust and for the removal of the trustees. The grounds for challenging trustees’ decisions essentially fall into the following categories:
(i) The step taken following the trustees’ decision was outside the scope of the trustees’ powers. This category of act was described by Lord Walker in the jointly heard cases of Futter and Pitt v HMRC[Futter and another v HMRC; Pitt and another v HMRC[2013 UKSC 26]] as”excessive execution”. A challenge on this ground would involve an examination of the trust documents to determine the scope of the trustees’ powers and analysis of the effect of the act to ascertain whether it falls within the scope of the powers. If it does not, then the act will be void.
(ii) The act was within the scope of the trustees’ powers but the trustees committed a breach of trust in failing to give proper consideration to relevant matters (or took into account irrelevant matters). This category of act was described by Lord Walker as”inadequate deliberation “and if the Court finds the trustees have committed a breach of trust, then the act will be voidable at the Court’s discretion. The Supreme Court has confirmed that this is the rule in Hastings-Bass as properly understood. Clearly, there is potentially plenty of scope for a beneficiary to argue that the trustees have not given proper consideration to relevant matters. Again, some guidance can be obtained from Lord Walker’s judgement; he confirmed that trustees must inform themselves of relevant matters before taking a decision, which may include tax considerations. A common complaint raised by beneficiaries is that the trustees slavishly followed the wishes of the settlor. There is no reason why trustees should not accede to the settlor’s wishes provided they can demonstrate that they have given thought to the matter themselves. As Lord Walker said”The Settlor’s wishes are always a material consideration in the exercise of fiduciary discretions. But if they were to displace all independent judgment on the part of the trustees themselves (or in the case of a corporate trustee, by its responsible officers and staff) the decision-making process would be open to serious question”.
(iii) The act was within the scope of the trustees’ powers but was exercised for a purpose, or an intention, which was outside of the power being exercised (commonly referred to as “fraud on a power”). There is no need for a beneficiary to demonstrate that the trustees acted dishonestly (though they may well have done). Where the power has been exercised improperly then the trustees’ act will be void.
(iv) The trustees had a conflict of interest in making the decision in question. Here, a beneficiary must show that the conflict was neither inherent in the circumstances of the trust when it was created nor expressly authorised by the terms of the trust. The trustees must then demonstrate that the decision was one which any reasonable trustee might have taken and that it was not influenced by the conflict.
(v) The act was a result of a mistake by the trustees (either a mistake of law or of fact). As a result of the Supreme Court’s decision in Holt/Futter v HMRC, there is no longer a requirement for the mistake of law to be as to the effect of an act rather than its consequences. However, the mistake must be of sufficient gravity for the Court to set it aside.
Evidence required to challenge trustees’ decisions
A beneficiary who wishes to challenge trustees’ decisions on any of the grounds above, may face difficulties in obtaining the information from the trustees which will enable a proper assessment of the likelihood of the Court declaring the decision void or voidable. Beneficiaries are not entitled to any trust documents as of right but they can usually expect to be provided with the “core” trust documents, for example, the trust deed, deeds of appointment and retirement of trustees, deeds of addition/removal of beneficiaries, and the trust accounts. A beneficiary, for example, who wishes to challenge an act of the trustees on the grounds at (ii) above, namely that the trustee committed a breach of trust in not considering relevant matters, will usually want to obtain information from the trustees regarding the exercise of their discretion. However, trustees are under no obligation to provide such information and are unlikely to decide to do so, particularly if the decision was or is likely to be a sensitive one or if they are concerned about preserving confidentiality. In which case, the beneficiary could make an application in the Chancery Division to determine the issue of disclosure. The costs of such an application are in the discretion of the Court. Therefore if the application is unsuccessful, then the beneficiary is likely to be responsible for the costs, which can act as a deterrent.
Where trustees consider that the decision they are proposing to take is particularly momentous, then they may wish to apply to the Court for its blessing of the decision. If the trustees obtain such a blessing, then this has the important effect that the beneficiaries are precluded from bringing any future claim against the trustees in relation to that decision. To benefit from this protection the trustees are therefore required to ensure that they disclose all of the relevant facts to the Court.
In the Court of Appeal decision in the Cardigan case [Cotton & Another v Brudenell-Bruce & Others EWCA Civ 1312] Lord Cardigan was challenging whether previous High Court judges were correct, in effect having approved the trustees’ intended sale of the main trust asset, Tottenham House. In summary, Lord Cardigan claimed that the expert advice which the trustees received raised a number of questions which ought to have prevented the Court from approving the intended sale; whereas the trustees’ view was that they should not be required to second guess that advice. The Court of Appeal agreed with the trustees. In the course of the judgment, the trustees’ obligations to provide information to the Court was emphasised by Lord Justice Vos who said that”In order to succeed in such an application, the trustees must, as Sir Andrew Morritt made clear in Tamlin v Edgar supra, put the Court in possession of all relevant facts so that it may be satisfied that the decision of the trustees is proper and for the benefit of the beneficiaries. Moreover, it must be demonstrated that the exercise of their discretion is untainted by any collateral purpose”. However, where the trustees have concerns about confidentiality obligations that they owe to beneficiaries, they may consider it appropriate for any confidential material to be disclosed only to the Court.
Whilst dissatisfied beneficiaries may seek to challenge the information provided by the trustees, it must be remembered that the trustees, in providing full and frank disclosure to the Court, are not under the same disclosure obligations that could arise where a hostile claim is commenced against them.
To conclude, it is possible to challenge a trustee’s decision but this area of law is both subtle and complex and there are cost risks. Advice from a specialist is therefore recommended before embarking on such a challenge.