In the matter of the X Trust 2002 JLR 377

TRUSTS: directions: Article 47, Trusts (Jersey) Law 1984: fraud on a power
In the matter of the X Trust 2002 JLR 377

This application was brought by the trustee of a discretionary settlement established by X in respect of which the beneficiaries are the son of X (referred to as the husband), the husband's children, any other issue of the husband and any charity.
As a result of the husband's divorce, the former wife applied to the Family Division of the Royal Court for financial provision. The court took into account the existence of the trust and its significant assets and ordered that the husband should (i) seek to procure the transfer to the wife of the former matrimonial home which is held by a company wholly owned by the trust; (ii) pay the wife a lump sum of £1.8 million; (iii) transfer to the wife a half interest in a named company; and (iv) transfer to the wife the majority of the contents of the former matrimonial home.
The trustee applied to the court seeking approval of its proposals to distribute from the trust £1.8 million in order to enable the husband to comply with the order of the Royal Court, cancel any loan accounts owed to the trust by the named company or vice versa, transfer the ownership of the former matrimonial home and contents to the wife, and distribute to the husband sufficient funds to enable him to discharge such order for costs as the Family Division might make.
The court noted that this application fell within the second category as listed in Re: S Settlement (2001) JLR N37 and that it was accordingly necessary to determine whether the trustee's decision had been formed in good faith, whether it was a reasonable decision and whether the decision was vitiated by any conflict of interest.
It was noted that the application also came within the first category referred to in Re: S Settlement since there was an issue as to whether the proposed distributions were within the powers of the trustee or would constitute a fraud on a power. The wife, who would be the ultimate recipient of the proposed distributions, was not a beneficiary of the trust.
The court referred to and agreed with the English authority of Netherton v. Netherton [2000] WTLR 1171 where it was held that in order to decide whether or not an appointment is a fraud on a power, the individual circumstances of each case must be examined. A power must be exercised bona fide and not for any purpose foreign to the power. In that case, whilst the husband was able to satisfy his obligations pursuant to a court order to make payments to his ex-wife from his own assets, it was recognised that those assets would be greatly depleted if he were to do so and that an appointment of funds to him as a beneficiary of a settlement would be for his benefit.
In relation to the proposed distribution of £1.8 million, the court noted that the Family Division had created a legal obligation on the part of the husband to pay this sum. There is established authority to the effect that a distribution to a beneficiary in order to allow him to make a payment to his creditor may be for his benefit and the court was satisfied that the proposed payment of £1.8 million from the trust to the husband would be for his benefit and would accordingly not amount to a fraud on a power. The court reached the same conclusion in relation to the loan account owed by the named company and any distribution that might be made to the husband to enable him to settle any order for costs; these would be distributions made in order to enable the husband to comply with his legal obligations.
The position in relation to the former matrimonial home and its contents was slightly different in that, as these did not belong to the husband, the Family Division had not actually ordered the husband to make the transfers but had asked him to seek to procure that they should be made. The husband had indeed requested the trustee to make the proposed transfers out of the trust. The court considered the circumstances and concluded that the primary purpose in making the distributions was for the benefit of the husband and his children (as beneficiaries) as it would enable them all to move on from the difficulties caused by the divorce and the resultant litigation.
Additionally, the court was of the view that there was a moral obligation on the husband to ensure that his former wife and children should be able to remain in what was the matrimonial home. In this regard, the court referred to the judgment in Re: Esteem Settlement (2001) JLR 7 which provided that trustees can regard a payment made with the consent of a beneficiary in discharge of his moral obligation to another as being for the benefit of that beneficiary.
Accordingly, the court was satisfied that the proposed distributions would not constitute a fraud on a power and, also, that the requirements in relation to the application, to the extent that it fell within the second category stated in Re: S Settlement, were also satisfied.
This note is intended to provide a brief summary of the judgment named. It is not intended to be comprehensive nor to provide legal advice and should not be acted or relied upon as so doing. Professional advice appropriate to the specific situation should always be obtained. If further information or specific advice is required, please liaise with your usual Bedell Group contact.
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