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Saunders v Vautier, Guernsey style

[Dynamic date]

26 February 2020

The much anticipated Court of Appeal judgment in the Guernsey case Molard International (PTC) Limited v Rusnano Capital AG (in liquidation)[1]  was handed down just before Christmas 2019 with the costs judgment following on 29th January 2020.  The case tackled head-on the Guernsey statutory equivalent of the rule in Saunders v Vautier and the question of whether an existing single beneficiary  could require a trust to be terminated notwithstanding that the trust instrument contained a power to appoint additional beneficiaries in circumstances where an individual claimed that he too should be appointed beneficiary and opposed the termination of the trust.

The facts

The factual background is set out succinctly by the Court of Appeal (Sir Michael Birt (former Bailiff of Jersey, now also a Justice of Appeal of the Cayman Islands) John Martin QC (also a Cayman Justice of Appeal) and David Perry QC). Rusnano Capital AG (in liquidation) ('Rusnano') was a subsidiary of a Russian state owned entity. The group invested in nanotechnology. A Mr Pavel Erochkine was an employee within the group. He worked on a transaction where an investment was made in a company called Pro Bono Bio PLC ('PBB'). The shares in PBB were to be held through a trust called the RN Pharma Trust. The trustee was a BVI company called Molard International (PTC) Limited ('the Trustee') and the appointor and enforcer of the trust was another BVI entity called Pullborough International Corp ('Pullborough'). Both BVI companies were beneficially owned by Mr Erochkine. There was a dispute between Mr Erochkine and Rusnano as to the background to the creation of the trust and whether there had been an intention that Mr Erokchine should benefit from the success of the investment in PBB through the mechanism of the Trust by being added subsequently as a beneficiary.

The trust instrument itself contained powers to add or exclude beneficiaries, the powers had not been exercised. At all material times there was only one beneficiary, Rusnano.

The liquidator of Rusnano wrote to the Trustee calling for the determination of the trust and invoking s.53 of the Trusts (Guernsey) Law 2007 which provides: 'Without prejudice to the powers of the Royal Court under subsection (4), and notwithstanding the terms of the trust, where all the beneficiaries are in existence and have been ascertained, and none is a minor or a person under legal disability, they may require the trustees to terminate the trust and distribute the trust property among them'.

The construction of s.53(3) and the right to terminate

The preliminary issue arose as to whether the power to appoint meant that the beneficiary class had not been ascertained and therefore the s.53(3) right to terminate did not arise.

The Deputy Bailiff found in favour of Rusnano, holding that, contrary to the generally accepted effect of the rule in Saunders and Vautier, and notwithstanding that the Guernsey provision was the enactment of an equivalent principle, the object of a mere power was not a beneficiary within the meaning of the 2007 Law. Rusnano was the only beneficiary and could therefore require the trust to be terminated. He held that: 'What matters … is how to give effect to the statutory regime that operates in Guernsey, using the definitions found in the 2007 Law itself and giving the other words their meanings through applying usual principles of statutory interpretation'1. He went on to find that the definition of beneficiary in the 2007 Law did not extend to the object of a power to appoint. In doing so, the Deputy Bailiff applied the same distinction drawn in the Jersey case In re Exeter Settlement.2

The Court of Appeal

The Court of Appeal upheld the Deputy Bailiff's judgment3. The Court accepted that the construction of s.53(3) meant that Guernsey law may not be to the same effect as the rule in Saunders v Vautier (the Court not finding it necessary to determine the issue under English law)4. It followed that, as a matter of Guernsey law, the agreement of the object of a power of appointment was not required by s.53(3)5. The Court noted that English trust law had in certain respects been modified by statute both in Jersey and Guernsey6.

S.53(4) twist

However, there was a twist. Both parties appeared to have overlooked the significance of s.53(4) when arguing about 53(3). It was only in the Notice of Appeal that the possible effect of subsection (4) was raised for the first time by the appellants.

53(4) provides that: 'The Royal Court, on the application of any person mentioned in section 69(2), may – (a) direct the trustees to distribute, or not to distribute, the trust property, or (b) make such other order in respect of the termination of the trust and the distribution of the trust property as it thinks fit.'

S.69(2) includes a trustee, settlor, beneficiary or '… with the leave of the Royal Court, any other person'.

It followed that, while the appeal failed as to the construction of s.53(3) it succeeded in its reliance on s.53(4).

The Court found that the Royal Court could make an order under subsection (4) notwithstanding satisfaction of the requirements of subsection (3). It enabled the Royal Court, amongst other matters, to make an order directing the trustees not to distribute the trust property and to make such other order in respect of the termination of the trust as it thought fit. The Court therefore upheld the Deputy Bailiff as to the construction of 53(3) but remitted the case to him to consider the exercise of his discretion under s.53(4).

The Court gave examples of the possible operation of s.53(3):

'A discretionary trust where the beneficiaries were described as 'the children and remoter issue of the settlor' would not be affected because, until there was no possibility of any remoter issue being born in the future, all the beneficiaries would not be 'in existence' as required by section 53(3). However, a discretionary trust whose beneficiaries were described as 'my wife X and my children A, B and C' could be brought to an end by A, B, C and X resolving to do so even if there was an intention to exercise a power to add grandchildren of spouses of A, B or C as beneficiaries at a later stage'.

The Red Cross trust argument

An interesting feature of the case was the Court of Appeal's rejection of an argument based upon the effect on so-called 'Red Cross trusts', ie trusts which commence life with only a single beneficiary, a charitable institution, where there is no real intention of benefiting that charity. The argument was along the lines that such an institution could instantly seek the termination of the trust and scoop the pot. The Court of Appeal was unmoved, saying: '… we are not necessarily too discouraged at the possible effect on such trusts. We question whether they are as common nowadays as perhaps they once were and whether they are to be encouraged in an international finance centre such as Guernsey, with a high reputation for upholding international standards'. The Court pointed out that beneficiaries could be added before a charity sought termination and again there was the possibility of an application under s.53(4).

Costs

The later costs judgment criticised both parties for not appreciating the significance of s.53(4). The Appellants lost on the principal issue (the construction of s.53(3)) which had taken up most of the written and oral submissions. A deduction was made of 20% to allow for the Appellant's success as to the s.53(4) issue7. The Respondents were therefore awarded 80% of their costs. Although Rusnano asked for costs on the indemnity basis they were awarded only on the recoverable basis. The Appellant's conduct (at least in the appeal where the s.53(4) point had been taken) had not been unreasonable. Costs below had been reserved to the Deputy Bailiff and remained to be decided.

The Court of Appeal refused to allow the Appellants to reimburse themselves from the trust fund either for their own costs in connection with the litigation or for the costs awarded against them. In reality the contest was between Rusnano and Mr Erochkine. Mr Erochkine ought to have been joined to the Royal Court proceedings, with the Trustee and Pullborough remaining neutral. The Appellants had fought Mr Erochkine's battle for him. If the Appellants were to be allowed to reimburse themselves, the consequence would be that, despite being successful, Rusnano would effectively have paid the losing party's costs in relation to the section 53(3) argument8.

Jersey?

It seems likely that the result would be the same under Jersey law given the similar wording of s.43(3) and (4) of the Trusts (Jersey) 1984 and given also that the judgment of the Court was delivered by Sir Michael, and the fact that both jurisdictions share the same panel of appeal judges, if not the same Court of Appeal.

Modification by statute

The Court made important observations about the nature of Guernsey (and Jersey) trust law and its relation to English trust law along with comments about statutory interpretation. In particular, the Court cited the cases of Spread Trustee Co Limited v Hutcheson9 and Investec Trust (Guernsey) Limited v Glenalla Properties Limited10 in support of the proposition that the question for the court was '… whether any rule of English law has been modified by a Guernsey statute …' concluding in the present case that: 'For the reasons which we have given, we are satisfied that it has'.

The specificity of Guernsey trust law

The case is therefore important for its emphasis on the fact that, while Guernsey trust law may owe a great deal to English trust law, it cannot be assumed that it is to the same effect. Guernsey trust law has its own specificity. In practice it will doubtless be rare that all beneficiaries will be in existence and ascertained and a potentially deserving, would-be beneficiary omitted, without a trustee having an opportunity first to appoint such. But in any event s.53(4) provides a lifeline.

Gordon Dawes & Matt Guthrie

Gordon and Matt acted for the then trustee and corporate service provider of the structure in the early stages of the dispute.

 

[1] [2019] GCA 077, the costs judgment is [2020] 2020 GCA 003. Known in practice as the Rusnano case.

1 Para 15.

2 [2010] JLR 169. A judgment of Sir Michael Birt when Bailiff of Jersey. See para 22 the Deputy Bailiff's judgment.

3 Para 46.

4 Paras 42 and 51.

5 Although, again note that agreement is not mentioned in s.53(3). It is, perhaps, implicit.

6 Para 51.

7 Counsel for the Respondent went to some lengths to calculate the percentage of paragraphs in the written cases and of time taken in oral submissions devoted to the s.53(4) issue.

8 Although ultimately depending upon how the Court determined the Trust should be administered.

9 (2002) GCA 299 and [2012] 2 AC 194.

10 [2018] GLR 97.

 

 

 

 

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