Meritus Trust Company Limited v Butterfield Trust (Bermuda) Limited: A wake up call for trust draftsmen?
The Supreme Court of Bermuda held that an outgoing trustee has no right:
- to retain trust assets in respect of known actual or contingent liabilities; or
- to require a contractual indemnity from the new trustee unless it is expressly provided in the trust deed that this requirement exists.
Butterfield Trust (Bermuda) Limited (the Outgoing Trustee) was removed as trustee of two trusts in December 2016 and Meritus Trust Company Limited (the New Trustee) was appointed as trustee in its place.
There were threatened claims against the Outgoing Trustee.
The New Trustee brought proceedings to require the Outgoing Trustee to provide copies of certain documents and to transfer all assets of the two trusts to the New Trustee. These were both granted.
The Outgoing Trustee argued that it was entitled to retain certain trust assets to enable it to enforce its indemnity in respect of its costs in relation to the threatened claim.
The New Trustee claimed that there was no right of retention of trust assets (and that even if there was, the Outgoing Trustee was seeking to retain $5m and it was not clear on what basis that figure had been calculated and in the New Trustee’s view $750,000 was a generous estimate of the potential liability).
The Outgoing Trustee also claimed that it was entitled to a contractual indemnity from the New Trustee.
Nature of rights of former trustee
It was common ground between the parties in the case that:
- All trustees, including former trustees, have a right of indemnity for liabilities incurred as trustee out of trust assets.
- That indemnity is secured by way of an equitable lien, which gives the present or former trustees a proprietary interest over all trust assets.
- If a former trustee does not have possession over trust assets, that lien is enforced by appointing a receiver over trust assets or forcing a judicial sale of trust assets.
- A new trustee takes trust property subject to the equitable lien of former trustees.
However, whether the nature of a former trustee’s rights gave it the ability to retain trust assets in the face of opposition from a new trustee was a separate issue.
Retention of trust assets
The Supreme Court agreed with the New Trustee that there was no general right of an outgoing trustee to retain trust assets.
There are statutory provisions in the Bermuda Trustee Act 1975 (which are identical to the equivalent provisions in the English Trustee Act 1925) which provide that trust assets vest automatically in the new trustee upon its appointment by deed and that where a legal transfer of trust assets is required and needs to be registered with a third party (e.g. shares / property), the outgoing trustee is obliged to execute the necessary documents.
It was decided that these statutory vesting rights on a change of trustee were not consistent with the Outgoing Trustee’s claim of a right to retain trust assets in light of threatened claims.
A distinction was also made between scenarios involving a distribution to a beneficiary (where trust assets can be retained by the trustee as the assets cease to be trust assets subject to the provisions of the trust) and a change of trustees where the assets remain “trust assets” and remain subject to the outgoing trustee’s equitable lien.
In the judge’s view, the Outgoing Trustee was sufficiently protected by the equitable lien that outgoing trustees have over trust assets.
The Supreme Court held that, in this case, the Outgoing Trustee had no right to a contractual indemnity.
It was decided that there is no right to a contractual indemnity unless this is expressly provided for in the trust deed. The judgment highlights the fact that there would need to be an express requirement to give a contractual indemnity in the trust deed rather than a mere right to request a contractual indemnity (as was the case in the two trusts in question).
While this is a Bermuda case, it has potentially wider implications particularly regarding the right to retain trust assets.
The Bermuda legislation setting out the statutory automatic vesting in a new trustee is based on and identical to the equivalent sections in the English Trustee Act 1925 and so it should be assumed that an English court would at least consider this judgment. Other jurisdictions with legislation based on the Trustee Act 1925 have similar provisions.
The case also provides helpful additional clarity about the nature of the former trustee’s rights where an unforeseen liability arises after it has ceased to be trustee. However, without possession of trust assets, the equitable lien may not be of much value if, for example, the successor trustee is in another jurisdiction. In some jurisdictions this issue is dealt with by giving an outgoing trustee a statutory right to “reasonable security”.
How can trustees protect themselves in this situation?
- Outgoing trustees could refuse to sign a deed of retirement and appointment unless it contains an indemnity / right to security. However, as the statutory vesting is triggered when a trustee is appointed by deed rather than the removal / retirement of the outgoing trustee, refusing to sign a deed is only likely to help where the trustee is retiring rather than being removed (on the basis that removal is usually automatic upon exercise of the power in the trust deed).
- We are likely to see an increase in trust deeds which contain an express provision regarding a right to a contractual indemnity (rather than a right merely to request one) and / or an express right to reasonable security. This will clearly be a point for negotiation when drafting the trust deed with trustees wanting it included and settlors resisting it.
The decision of this case is potentially wide-ranging both geographically and in terms of drafting considerations. Trustees should be mindful of this decision, particularly on a change of trustees. Trustees and trust draftsmen should also consider this decision and the statutory vesting provisions (where relevant) when drafting the trust deed itself and consider including express provisions regarding rights to contractual indemnities and to retain assets as “reasonable security”.