Is it irrational when a trustee won't wait for a Cheshire cat?

19 Feb 2019

The Cayman Islands (‘Cayman’) Grand Court (‘Court’) recently blessed the Final Distribution Proposal (‘Proposal’) of a trustee (‘Trustee’) of a family trust (‘Trust’) which benefited two sisters and their brother. The Court was in no doubt that the Trustee had the power to make the decision and that it should be approved by the Court unless the brother persuaded it that the Proposal was, in whole or in part, irrational.

What was the purpose of the Trust?
The original purpose of the Trust was to ensure the equal division between the settlor’s children of all the assets in the Trust (mostly property holdings) and to avoid a contested administration of the settlor’s estate. The Trustee was given broad discretionary powers and there was no legal obligation to consult the beneficiaries on the Proposal.

If the Trustee had the power, why did it ask the Court?
The application to the Court was because the settlor’s son had complained that the Trustee had not fairly evaluated on the merits his representations on the distribution of the assets. The son argued that the Trustee had instead favoured the views of both sisters. The Trustee applied to the Court asking that it either (a) authorise the Proposal or, if not, (b) give directions on how the Trust should be administered differently.

What was the Court being asked to consider?
All the parties agreed that the final distribution was a decision which the Trustee had the power to make. The Court considered the overriding test to be that in the decision in Cotton-v-Earl of Cardigan [2014] EWCA: the critical question that the Court must consider is whether:

"the opinion of the trustees was one which a reasonable body of trustees properly instructed as to the meaning of the relevant clause could properly have arrived at”.

What are the legal principles which apply?
Trustees should not use Court approval as a rubber stamp to avoid their having to take responsibility for making the decisions which the trust/settlor has given them. Trustees should only ask the Court to approve their decisions when there is good reason to do so. They will need to demonstrate that the decision is not tainted by some other purpose and that the trustee has properly considered all relevant matters. To demonstrate this, the trustees must, fully and frankly, put all relevant information before the Court so that it will have a proper evidential basis when it decides whether or not to approve the trustees’ decision.

What if the Court would have made a different decision?
Once the Court has decided that the trustee has the power to make the decision, all the Court can do is to assess whether the decision falls within the limits of rationality and honesty. It cannot withhold its approval because it would not have put forward the same proposal as the trustee.

What was the Proposal?
The Trustee's Proposal was to determine the value of the Trust and then divide it by three. There had been a non-binding agreement between the beneficiaries on a Final Distribution, but the son had later withdrawn from that agreement and put forward different proposals for the valuation and realisation of individual property assets, leases, and dividends and their relationship with the companies which held the assets. The son argued the Trustee was irrationally failing to consider his alternative proposals for distribution and had therefore not taken a material factor into account.

Did the Court find irrational behaviour?
The Court did recognise that there was an appearance of inequality in the Proposal to the extent that one sister’s wishes concerning properties were broadly accepted by the Trustee and the son’s wishes wholly ignored. However it found that a reasonable trustee could have rejected the ‘counter offer’ made by the son. Addressing the complaint that the Trustee’s non-response to the son’s suggestion was irrational, the Court found that whilst the Trustee did not give an express reason at the time for ignoring his suggestions, it ought to have been obvious to the son that the reason for this approach was to bring what had become a lengthy consultation process to an end:

“The Trustee was entitled to at least fear that any proposal which [the son] made was likely to be as ephemeral as a fabled Cheshire cat.”

The Court did not find the Trustee’s decision was irrational and it approved the Proposal.

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