CHAPTER 1
Introduction
Richard Williams Queensland Bar
1. Introduction
In December 1999, the Trust Law Committee in England issued a consultation paper, The proper protection by liens, indemnities or otherwise of those who cease to be trustees. The paper provided an illuminating analysis of the law in this area, in particular as regards the equitable non-possessory lien and the steps that an outgoing trustee may take to protect his position in relation to the reimbursement of properly incurred liabilities. The Society of Trust and Estate Practitioners (STEP), through its technical committee, issued a response in April 2000, after consultation with James Kessler QC. The conclusion was that, while the present law in this area was not ideal, statutory reform was not necessary. The technical committee did, however, put forward a proposal:
The most common source of difficulty in practice in this area arises, we believe, on the appointment of new trustees. Retiring trustees seek covenants which are not acceptable to the new trustees, and the negotiation of these covenants sometimes gives rise to considerable expense and delay. We think this problem could be mitigated if there existed a protocol (perhaps with standard precedents) setting out what is regarded as an appropriate covenant in normal cases.
This guide, the first edition of which was published by STEP in 2007, seeks to provide such a protocol on indemnities in connection with the transfer of trusteeships, together with precedents. It is not intended as a substitute for the existing practitioner texts on trust law, which address these topics in detail, nor of course for appropriate legal advice. Rather, it is intended to address some of the practicalities, and to provide a STEP standard approach for dealing with indemnities on transfer. Guidance has also been included on the related topics of the inspection and transfer of trust documents, the handling of the transfer of trusteeships in contentious situations, and trustee indemnity insurance.
The approach that is put forward in respect of indemnities can be summarised as follows:
1. In all of the offshore jurisdictions that are covered in this guide, apart from The Bahamas, the British Virgin Islands, Hong Kong and Singapore, chains of indemnity appear to be regarded as commonplace in the local trust industry. This is despite the view expressed in the STEP response of 2000, referred to above, that it may be satisfactory to rely on the non-possessory lien (where available) without also using a chain of covenants. For the reasons that are stated at 2.3 below, practitioners are urged to adopt a much more cautious approach to the inclusion of chains of indemnity, particularly if the past administration of the trust has been straightforward and there are no factors that indicate that there might be any possible current or future liability for the retiring trustee. In many cases, consideration could be given to relying instead on the trustees' lien.
2. There is, nevertheless, an obvious need in the industry for precedents that provide for chains of covenants, for those cases where there are contentious issues or known or anticipated liabilities. The authors have therefore aimed to provide in the offshore precedents contained in this guide, a standardised form of indemnity clause that provides for such chains. In the course of preparing the precedents, it has become apparent that there are many pitfalls associated with the drafting of such indemnity clauses, and those matters have been addressed, so far as possible, in the drafting commentary in chapter 14. We are indebted to Lynton Tucker of New Square Chambers for the time that he generously devoted to this project, on a pro bono basis, by way of settling, under English law, the longform indemnity clause (and ancillary provisions) which appears in the precedents in the appendices. Practitioners may at first sight be surprised at the length of these indemnity provisions but it should be appreciated that these precedents are not intended for use in every situation but rather as a starting point for the draftsman in those particular cases where, after careful consideration, a chain is thought to be needed. These indemnity clauses have also been included in the England and Wales precedents, on the basis that chains of covenants may be needed for more complex cases. It should be stressed again that these precedents will not be appropriate for many straightforward cases where the lien, or a simpler form of indemnity without any chain, may be sufficient.
3. The precedent deeds provided for trusts under Bahamian, British Virgin Islands and Singapore law do not include any chains of covenants. This is intentional because it appears inappropriate to encourage the use of such chains where that is not currently the local practice. The same approach has been taken for the Hong Kong and New Zealand law precedents. It is understood that the use of chains of covenants is not as common in those jurisdictions as in the other offshore jurisdictions covered in this guide, although practitioners' views may vary in Hong Kong regarding indemnities.
4. The position is also different in Jersey, where a simplified form of chain of covenants is often used.
It should also be noted that this guide relates only to private inter vivos (lifetime) trusts – reference should be made to the appropriate practitioner texts for details of the special considerations that apply to charitable trusts, will trusts, employee benefit trusts, pension trusts and commercial trusts.
Two particular matters that are outside the scope of this guide are flee clauses (and other provisions for the automatic removal of trustees in specified circumstances) and conflict of laws. The Hague Trust Convention 1985 provides, in Article 8, that the proper law of the trust shall govern "the appointment, resignation and removal of trustees". Other laws may also be relevant, particularly the lex situs of the property that is to be transferred (ie the law of the place where the property is situated). The issue of conflict of laws in relation to international trusts can be complex and appropriate advice should be sought.
I would like to thank my co-editors, Arabella Murphy and Toby Graham, for their work on this project, and Nicholas Le Poidevin QC for his advice, at the time the first edition of this guide was prepared, on various drafting issues. Thanks are also due to the Jersey project group (Steve Meiklejohn, Alan Dart, Giles Corbin and Linda Williams) for making available, in connection with the preparation of the first edition, the fruits of their previous work relating to the preparation of model deeds for use by the trust industry in Jersey.
While it is hoped that the law is accurately stated as at June 2017, the views expressed herein are for the purpose of further consideration only and should not be acted upon without independent professional advice. The precedents contained in this work, and the accompanying drafting commentary, relate to a relatively unlitigated, and developing, area of the law. As already mentioned, the precedents are intended only as a starting point and will need to be adapted to suit the particular case, and in any event should not be acted upon without independent professional advice. No responsibility can be accepted by the authors, editors or publishers for any loss or damage occasioned to any person acting or refraining from acting as a result of anything contained in this work.
CHAPTER 2
English law trusts
2.1 Statutory and express powers of retirement, removal and appointment
2.1.1 Introduction
The statutory provisions governing the appointment and retirement of trustees are mainly contained in sections 36 to 39 of the Trustee Act 1925 (as amended by the Trusts of Land and Appointment of Trustees Act 1996). The principal statutory provisions (in their amended form) are set out at 2.1.5 below.
Although the code is broadly satisfactory, there are a number of anomalies and when drafting a settlement the draftsman may wish to consider amendments along the lines suggested below.
The draftsman will usually nominate a specific person for the purpose of appointing new or additional trustees. Often this is the settlor but it could be a protector. In the absence of any express nomination, or if the nominated person is unable or unwilling to act, it will be the surviving or continuing trustees for the time being (or the personal representatives of the last surviving or continuing trustee) who have power to appoint new or additional trustees.
It is important that the settlor or other person who has the power to appoint trustees should be able to release or delegate that power if so required. Under English law, a power of appointment of trustees is a fiduciary power (Re Skeats Settlement) and so cannot be released without express provision in the trust instrument. It may be convenient at a later date for the settlor to release the power; for example, if he were to move to the United States, it would probably be necessary for tax reasons that any power to appoint trustees be released.
It is suggested that caution should be exercised before the spouse of the settlor is given the power of appointing trustees after the settlor's death. The possibility of divorces and second marriages may make this option undesirable. It may be preferable to give the spouse a power of appointment only while they remain married to the settlor. It is also sensible to name the spouse. For example, if a clause in a family trust provides that the power of appointing trustees is exercisable by "the settlor during his life and thereafter by his widow during her life", the settlor may have remarried and the widow with the power of appointment may not be the mother of the children who are beneficiaries of the trust.
Jasmine Trustees Ltd v Wells & Hind highlights the importance of limiting the retainer when drafting documents to change trustees to say that the drafter will or will not check that all previous appointments of trustees have been validly executed. In Jasmine Trustees, a mistake in 1982 meant that all subsequent trustee appointments were void.
2.1.2 Retirement of trustees
Under section 39(1) of the Trustee Act 1925, a trustee can retire voluntarily but only if there will be either a trust corporation or at least two persons remaining after his retirement to perform the trust (even if there was originally only one trustee). The retirement must be by deed, which should be executed by the retiring trustee, by his co-trustees and by such other person, if any, as is empowered to appoint trustees. Provided that the co-trustees and such other person consent to the discharge of the retiring trustee and to the vesting in the co-trustees alone of the trust property, the retiring trustee shall be deemed to have retired from the trust and shall, by the deed, be discharged from the trust.
Before the amendment introduced (with effect from 1 January 1997) by the Trusts of Land and Appointment of Trustees Act 1996, the requirement was for a trust corporation or two individuals to act after the retirement. Therefore, section 39 did not apply where the effect of a retirement would have been to leave only a corporate trustee (not being a trust corporation as defined by statute) and one individual, or two corporate trustees (not being trust corporations), to act. This was often a particular problem for offshore settlements. Whenever taking over a new trust, the previous deeds of retirement and appointment of trustees should be checked to ensure that this requirement has been satisfied. The position now is that a trust corporation or two persons must remain following a retirement under section 39.
It is possible in the original trust instrument to set a retirement age, such as 65 or 70, so that a trustee can be replaced automatically on attaining the specified age. This method is becoming increasingly common and follows the company law practice of providing that a director of a public company must offer himself for retirement at the age of 70.
2.1.3 Replacement and appointment of trustees
Section 36(1) of the Trustee Act 1925 provides for replacement of a trustee in five circumstances:
• death;
• remaining out of the United Kingdom for more than 12 months;
• desiring to be discharged;
• refusing or being unfit to act; and
• being incapable of acting.
In addition, if a minor has been appointed then the appointment is void and section 36(1) allows for a new appointment to be made to fill the vacancy.
The section applies whether the trustee is original or substituted and whether he was appointed by a court order or otherwise. If no persons are nominated with the power of appointment (or if the person nominated for that purpose is unable or unwilling to act), then the power of appointing new trustees in place of the outgoing trustee is left to the surviving or continuing trustees for the time being, or to the personal representatives of the last surviving or continuing trustee. The appointment must be made in writing. In practice, a deed will almost invariably be used.
Under section 36(1), it is permissible to increase the number of trustees (except that in relation to land the number of trustees may not be increased beyond four: see section 34). Thus if there are three trustees and one wishes to retire, it is permissible to appoint two new trustees in place of the retiring trustee to bring the number up to four.
Prior to the amendment introduced by the Trusts of Land and Appointment of Trustees Act 1996, the requirement once again was for a trust corporation or two individuals to act after the replacement and appointment. Failure to satisfy this requirement would not make the appointment of the new trustee invalid, but it would fail to discharge the outgoing trustee. However, with effect from 1 January 1997, it is necessary only to have a trust corporation or two persons remaining (although see the discussion below in relation to the situation where there was originally only one trustee). This requirement for two persons can be overridden by the provisions of the trust instrument: see, for example, London Regional Transport Pension Fund Company Ltd v Hatt.
The replacement of trustees under section 36 is not always simple. Section 36(9) states that a trustee who has lost capacity may not be replaced using the section 36 power where that trustee also has a beneficial interest in the trust property, unless leave to replace them has been given by the Court of Protection.
The process for applying is both protracted and detailed. It is set out in Practice Direction G to Part 9 of the Court of Protection Rules 2007, and includes an extensive list of suggested exhibits to accompany the application, including the trust document, conveyancing documents, details of the existing trustee(s) and independent witness statements confirming the suitability of the new trustee (if they are not the incapacitated person's deputy).
This means that if it is thought that there is a real risk that the life tenant may lose capacity then they should not be appointed as a trustee.
A retiring trustee has an indemnity against the trust fund as a matter of trust law even if no express indemnity is included in the deed of retirement. However, express indemnities are often inserted. Various time limits and other restrictions to the express indemnity may be included, the precise terms of which will be a matter for negotiation between the outgoing and the new or continuing trustees. The new or continuing trustees should not give an indemnity to the retiring trustees that is greater than the indemnity to which the retiring trustees would have been entitled under the terms of the settlement if they had remained trustees. It is unusual for the retiring trustees to insist on some sort of security for their indemnity but this may be desirable if there are definite ascertained liabilities for which they could be liable.
If there was originally only one trustee, whether or not a trust corporation, and the trust is not a trust of land, it is permissible to appoint one trustee only in place of that trustee or any trustee who has replaced him and that appointment will be effective to discharge the outgoing trustee: section 37. In any other case, there must be either a trust corporation or at least two persons to act as trustees following the appointment. Therefore, if two trustees are originally appointed and one dies and the other wishes to retire, it will be necessary first to appoint two additional trustees before the other trustee can be validly retired. If this is not done, the other trustee who wishes to retire will not be discharged and will remain in office together with the new trustee.
