Offshore: Bermuda

Where a trust is subject to English law, trustees who wish to enter into a particular transaction but who do not have power to do so can apply to the courts for that authority. If the court is satisfied that the transaction would be ‘expedient’ (in the context of the trust as a whole), it can then confer on the trustees the necessary power.

But there are limits to this jurisdiction. In particular, for more than 50 years it has been clearly established that such an application, made under Section 57 of the Trustee Act 1925, can only permit the court to confer a power “in the management or administration” of the property vested in the trustees. It cannot authorise any modification of the trusts which affect that property. This situation and this limitation are mirrored in the legislation of many offshore territories.

At a cursory first glance, Section 47 of the Trustee Act 1975 (Bermuda) might be thought to replicate the substance of the English Section 57. In reality, though, what was enacted was a hybrid, combining elements drawn from Section 57 (with key omissions) and also from another English statutory provision, Section 64 of the Settled Land Act 1925.

The overall effect of this hybrid is crucial in distinguishing English law from Bermudian law. This was highlighted in a recent court case in Bermuda.

In a recent case involving a commercial trust, the court recognised that, under Section 47, where the court confers a power on trustees to effect a transaction which is “expedient”, such a power is in appropriate circumstances capable of being conferred on terms which modify the trusts, affecting the trust property to an appropriate extent.

In Bermuda, as in England, there are distinct statutory provisions dealing with the variation of trusts. Hence it was to be anticipated that, independently of the point on the scope of Section 47, the court in Bermuda would look carefully at the circumstances in which it was sought to use Section 47 to modify the trusts in this way and at the exact modifications to the trusts which were sought.

Thus, in the case in question, the trustees had to persuade the court that, while it might want to impose some limits on the use of Section 47 in this way, this particular case was on the right side of any line the court might draw.

It was accepted by the trustees that there had to be a sufficiently close nexus between the particular transaction which was “expedient” and authorised (by the conferring of the new power) under Section 47, and the modifications to the trusts which were to be effected.

Furthermore, it was also said by the trustees that all the modifications could properly be treated as necessary or appropriate amendments consequent upon, and/or ancillary to, the conferring of the new power.

An alternative justification for all the modifications sought lay in the principle that the court will not insist in circuitousness where the same result can be achieved directly. On this basis, it was said by the trustees that they could (as an alternative) have applied under Section 47 for authority to transfer the capital to themselves on the trusts of a new trust which were the same as those of the existing trust, modified as proposed. If that was right, it should be possible to bring about the same result directly without a transfer to a new trust, as was proposed and as the court accepted.

A representation order (an order that a beneficiary should represent the interests of all the beneficiaries) was made so that their interests were properly considered. But in an application under Section 47, the criteria is “expediency”: there is no requirement that the order made must necessarily be for the benefit of all the beneficiaries.

The decision in Bermuda has wide-ranging implications in the context of ‘commercial trusts’, such as trusts operating a scheme for the benefit of employees within a group of companies, where it may now be possible to modify the trusts without the prior consent of all the beneficiaries.

The trustees may need the authority of the court to enter into a particular transaction, for example to sell shares in the group which are held by the trustees if at a future date there is a change of control of the group (because of a takeover). In those circumstances, it may be desired that changes should be made to the trusts in order to ensure, consistently with the original purposes of the trust, that the real beneficiaries benefit and that there is no possibility of the bidder, through manipulation, extracting value from the trust and thereby funding the bid at the expense, in part, of the trust itself.

If the trust is governed by Bermudian law, it may be possible to obtain an order of the court under Section 47 that achieves this result. Of course, any such case will turn on its own facts, the terms of the trust and what is proposed.

Such a result may not be available if English law, or that of some offshore territory other than Bermuda, applies.

Statutory jurisdictions for the variation of trusts require the consent of existing beneficiaries and approval by the courts on behalf of future beneficiaries. Large numbers of beneficiaries may be involved. Existing beneficiaries will be reluctant to agree unless they can extract some benefit; approval by the courts on behalf of future beneficiaries will not be forthcoming unless there is some demonstrable benefit. Hence the necessary consents and approvals may not in practice be attainable in the sort of case under consideration.

An alternative jurisdiction that can lead to a variation of a trust is dependent on the existence of a genuine dispute and its compromise, but in the sort of case under consideration there may be no such dispute, and even if there is it may in practice again be impossible to obtain the consents and approvals by the courts which are necessary to make the compromise binding.

A trust governed by the law of Bermuda, then, may be in a special position. Provided that the trustees need the authority of the courts in Bermuda to enter into a transaction that the courts can legitimately regard as ‘expedient’, it may be possible to obtain an order of the court which not only confers the power to enter into the transaction, but also varies the trusts in appropriate terms – something which hitherto has been considered impossible. There is considerable scope for creative thinking here.

David Lowe QC is a chancery and commercial law specilaist at Wilberforce Chambers