23 April 2008

ATC (Cayman) Ltd v. Rothschild Trust Cayman Ltd [2006] 9 ITELR 36


Facts of the Case

ATC succeeded Rothschild as trustees of two trusts governed by the laws of the Cayman Islands.

Rothschild sought an indemnity from ATC in respect of any future liabilities as trustee.  The trust instrument contained a provision expressly giving the trustees power to indemnify.  ATC offered to ensure the funds stayed in the trust for a specified period to cover any likely liability that Rothschild faced.

Rothschild refused to accept any formal undertaking from ATC on the basis that for ATC to do so would be fettering its discretion as trustee.  In support of its position, Rothschild relied primarily on Re Gibson’s Settlement Trust where an under taking given by the trustees to appoint absolutely trust assets to the settlor’s two children was set aside as fettering the trustees’ discretion. 

ATC sought the ruling of the court whether it could enter into the proposed undertaking.

The Decision

The question before Smellie CJ was whether the express clause overrode the settled principle from case law that a trustee should not fetter their discretion.

Smellie CJ confirmed that whether ATC could give the undertaking was a matter of construction, which was distinct from seeking to surrender the exercise of ATC’s discretion to the court.

After reviewing the key texts on trustees’ powers Smellie CJ confirmed that a trustees’ discretion could be fettered by an express clause in the trust instrument.

In light of the fact that it was clear that in the present case the impasse was impacting on the proper management of the trust assets and an outgoing trustee is entitled to an indemnity, Smellie CJ found that the express clause within the trust was “prudent drafting”. 

Smellie CJ rejected the argument that trustees should not fetter their discretion as this was overridden by an express clause allowing ATC to offer Rothschild an indemnity.  The provision of an indemnity was not an improper or impermissible fetter upon the exercise in the future by ATC of its discretionary dispositive powers. 

Points of Interest

The case reiterates the need to carefully consider the trustees’ express powers set out in the trust instrument.  The express provision authorising the trustees to give an indemnity made it difficult for Rothschild to argue that ATC were fettering their discretion.   

In delivering his judgment Smellie CJ noted that “ … it can seldom, if ever, be appropriate for a trustee to exert pressure to secure its own entitlements, to the detriment of its beneficiaries, by withholding the entire or a very large proportion of the trust fund”.   

Category: Article