Guernsey Royal Court: Application to Terminate Trust

The recent Guernsey case of Rusnano Capital AG (in liquidation) v Molard International (PTC) Limited and Pullborough International Corp [2019] GRC011 has, for the first time, addressed the circumstances in which the beneficiaries of a discretionary trust can compel the trustee to make a distribution and terminate the trust.

This decision has important implications for Guernsey and Jersey law discretionary trusts because the decision is based upon a statutory provision which is identical in both islands. That provision is based upon the so-called rule in Saunders v Vautier, which is derived from an English trust law case from the early 19^th century.

Before this decision, the Guernsey (and Jersey) courts had not considered whether the rule in Saunders v Vautier applies in circumstances where:

1. the trust in question is discretionary in nature;
2. there is only one beneficiary; and
3. there is an open class of beneficiaries, including potential future beneficiaries who have not yet been ascertained.

Rusnano Capital AG (“RCAG”), a Swiss company, was the sole beneficiary of the RNPharma Trust. The trust was discretionary. The trustee had a power to add and remove beneficiaries, however those powers had never been exercised.

Following financial difficulties, RCAG went into liquidation. In order to accumulate funds to make distributions to its creditors, it brought an application under Articles 53 and 69 of the Trusts (Guernsey) Law 2007 to seek an order to terminate the trust fund. The application was brought against the trustee and the enforcer. The trust property consisted primarily of shares, which RCAG sought to obtain.

The main issue in the application was whether the trustee was obliged to carry out the beneficiary’s request for a distribution and termination of the trust. In considering this, the Royal Court had to determine the following questions:

1. Who is a beneficiary?
2. Where there is a power to add or remove beneficiaries (but it has not yet been exercised), does this have any bearing on the current beneficiaries’ ability to require the trustee to make a distribution?
3. Does being the only beneficiary of the trust, albeit only for the time being, entitle the beneficiary to require the trustee to make a distribution?

The rule in Saunders v Vautier derives from an English trust law case from 1841. The rule is that where an adult beneficiary, or group of adult beneficiaries who all have capacity, has (or between them have) an absolute, indefeasible entitlement to the trust property, they can at any time require the trustee to distribute the trust property and may terminate the trust.

The Trusts (Guernsey) Law 2007 contains the following provision in section 53:

Termination of trusts.

[…]

“(3) 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.”

[…]

Section 53(3) is clearly an attempt to codify (and is a close approximation – but is crucially not identical to) the rule in Saunders v Vautier.

The precise wording of section s53 (3) is the basis upon which the decision in Rusnano was reached. The statute uses the phrase “all the beneficiaries are in existence and have been ascertained.” This has implications for Jersey because Article 43 Trusts (Jersey) Law 1984 is drafted in exactly the same terms and so, in a case with similar facts, the result is likely to be the same in Jersey.

The crucial phraseology in the statute is “all the beneficiaries are in existence and have been ascertained.”

In analysing who is a beneficiary, the court looked to the definition in the Trusts (Guernsey) Law 2007. A beneficiary is defined as “a person entitled to benefit under a trust or in whose favour a power to distribute trust property may be exercised.” According to the 2007 law, a beneficiary needs to be either i) identifiable by name ii) identifiable by reference to a class or iii) identifiable by reference to a relationship to another person, whether or not living at the time of the creation of the trust, or at the time by reference to which members of a class are to be determined under the terms of the trust.

Clearly RCAG was a beneficiary because it was named as a beneficiary.

The court in Rusnano also concluded that the fact that the trustee had a power, which it could exercise but had not yet done so, to add beneficiaries to the class of objects, did not turn those potential objects of the power into beneficiaries of the trust.

The Guernsey court cited with approval the following principles set out in the Jersey case of In Re Exeter Settlement 2010 JLR 169:

“[…] A beneficiary of a discretionary trust is a person in whose favour a discretion to distribute income or capital of a trust may be exercised. Trustees may only exercise their power to distribute income or capital in favour of a person who is a beneficiary. It is the beneficiaries who are objects of the discretionary trust.[…]

“A power to add beneficiaries is something completely different. It means what it says. A person who is a possible object of a power to add beneficiaries is not in fact a beneficiary unless or until the power is exercised in his favour and he is added as a beneficiary. Until that moment, the trustees may not apply income or capital for his benefit and he does not have any of the rights attached to being a beneficiary of the trust. The sole right that he has is as a possible object of the power to add beneficiaries…”

As a result, the Guenrsey Royal Court concluded that a potential object of a power to add beneficiaries is not a beneficiary of the trust. RCAG was the only beneficiary of the trust that was ascertainable and in existence, and was therefore entitled to use section 53(3) to terminate the trust and take control of the trust assets.

The effect of section 53 (and Article 43 in the Trusts (Jersey) Law 1984) is therefore that it applies only to beneficiaries who have been appointed as such at any given point in time, regardless of the existence of a power to add more beneficiaries to the class of objects in the future.

It is well understood that beneficiaries of a discretionary trust are mere objects of the trustee’s power to make distributions and do not have any vested interest in the trust property. The rule in Saunders v Vautier comes from a time when trusts were concerned with vested beneficial interests, before the modern use of discretionary trusts. A question for the court in Rusnano was whether the rule in Saunders v Vautier applied at all to discretionary trusts, on the basis that if none of the beneficiaries had a vested proprietary interest over the whole trust fund the justification for the rule fell away.

However in Rusnano, the court reached its decision on the basis of the wording of the statute. Unlike the rule in Saunders v Vautier, the statute does not contain any requirement that the beneficiaries have an absolute, vested and indefeasible interest in the trust property in order to exercise their right to call for a distribution of the property and terminate the trust.

The decision throws up an apparent disparity between the requirements of the rule in Saunders v Vautier and the wording of the Guernsey statute. The court has clarified that section 53(3) and the rule in Saunders v Vautier are not the same thing. It is possible for beneficiaries who comprise the entire beneficial class to collectively require the termination of the trust and a distribution of the trust property without any one of them having a vested interest. Was this the intention of the States of Guernsey and Jersey when they enacted the legislation?

Where there is no power to add beneficiaries under the terms of the trust, does that remove all doubt as to the ability of beneficiaries who are all adults and who collectively represent the entire beneficial interest to require the trustee to make a distribution to them?

How far does the application of section 53(3) (in the Guernsey trust law) and Article 43 (in the Jersey trust law) extend beyond requiring the trustee to distribute the trust assets and terminate the trust? Could the statute enable beneficiaries to call for a distribution that falls short of the entire fund, therefore allowing the trust fund to continue and not terminate?

Could a single beneficiary or beneficiaries representing the entire beneficial interest collectively direct the trustee in the exercise of its other powers and discretions? Could beneficiaries require a distribution from the trust fund where the trust is subject to contingent liabilities?

Given that discretionary trusts were not contemplated when the rule in Saunders v Vautier was first devised it would seem that the rule, as it exists in English law, is of very strict and limited application to Jersey and Guernsey trust structures. The result of the decision in Rusnano is that both Guernsey and Jersey have a narrower set of requirements that need to be satisfied in order to allow beneficiaries to terminate and take possession of the trust property than was possible under the traditional rule in Saunders v Vautier.

Trustees of Guernsey and Jersey law discretionary trusts are now vulnerable to an application being made against them to distribute the trust fund where the beneficial class is closed (for example where there isn’t a power to add beneficiaries). Trustees are also vulnerable where the beneficial class includes only ascertained persons regardless of whether there is a power to add beneficiaries.

One of the arguments raised by the trustee against the beneficiary in Rusnano was that if the beneficiary’s argument was preferred, the decision would have far reaching consequences for so called “Red Cross” or “Black Hole” trusts in Guernsey and elsewhere. In particular there was a concern that the decision would put an end to the practice of settling discretionary trusts with a nominal ‘backstop’ charitable beneficiary whose purpose is simply to satisfy the requirement for an object to properly constitute the trust but in reality the ‘real’ beneficiaries are to be added later.

As a result of Rusnano, in the window between settlement of the trust and the addition of the ‘real’ beneficiaries, the sole nominal charitable beneficiary would be entitled to require a distribution of the entire trust fund to itself.

There are clearly a number of problems with this line of argument, some of which the Royal Court of Guernsey addressed, some of which they did not.

The Royal Court of Guernsey dismissed this argument by pointing out that if such practices were adopted, ‘such a charity would quickly discover that it will no longer be the preferred charity in such cases going forwards…’ and that ‘an immediate windfall may not be a sound longer term strategy’. Practically speaking, back-stop charitable beneficiaries are never told that they are the object, let alone the sole object, of a discretionary trust so as to be in a position to call for a distribution of the trust assets.

However, that conclusion misses the point. As a matter of principle, trusts should not be settled with beneficiaries who the settlor and trustee never intend to benefit from the trust. Such a disparity between the intention of the settlor (and the trustee) from the wording of the trust instrument brings the trust dangerously close to satisfying the requirements for a sham arrangement.

A simpler way to avoid the effect of the decision in Rusnano would be to structure the beneficial interests from the outset to ensure that the beneficial class remains open by exploiting the provisions in Art 10 and Art 36 of the Trusts (Jersey) Law 1984 (and their Guernsey equivalents). One way of doing this would be to create a beneficial class that includes unascertained persons such as ‘issue’ or a beneficial class that is sufficiently wide with diverse enough interests (while still satisfying the certainty test in McPhail v Doulton) to prevent the practical possibility of the beneficiaries coming together to act collectively.