Trustee self-dealing in the light of the E&F Settlements cases
An extension of these principles is the rule against self-dealing, which prohibits trustees from purchasing property from the trust, selling property to the trust or otherwise dealing with the trust in their personal capacity. The idea is that trustees, however honest, cannot act both for themselves and for beneficiaries in the same transaction without at least risking a conflict between their personal interests and their duties as trustees.
The rule likewise prohibits a trustee of multiple trusts from transacting between those trusts, where there is a risk that their interests as trustee of one trust may conflict with their interests as trustee of the other.
Other than in limited exceptional circumstances, it is not relevant for this purpose whether the trustee (personally or in the capacity of trustee of another trust) actually derived any advantage from the transaction. The duty is to avoid any opportunity to derive advantage, whether or not that opportunity is taken. The rule can therefore be breached if a trustee made no profit or even made a loss.
If a trustee does self-deal, generally speaking the transaction will be voidable and any beneficiary will be able to have it set aside.
A trustee may self-deal if the transaction:
- is authorised by legislation or a court;
- is carried out using a power expressly set out in the trust instrument;
- has been fully disclosed to and approved by the beneficiaries; or
- involves a conflict created by the trust instrument or the settlor and not by the trustee.
There are also some circumstances in which the rule is not applied strictly. If a transaction would genuinely be in the interests of the beneficiaries, and the trustee can demonstrate that it was on terms that could have been made at arm’s length, the courts have sometimes been prepared to take a more flexible approach.
When establishing a trust, settlors should think about transactions they may want the trustees to carry out in the future and make express provision for them in the trust deed. It is possible to exclude the rule against self-dealing, though care should be taken to ensure that beneficiaries still have some protection.
If a trust has already been created and the terms cannot be amended, a trustee in a position of conflict would need to consider approaching the beneficiaries, or the court, for consent. The latter course can be time-consuming and expensive and is likely only appropriate in cases with significant value at stake.
The E and F Settlement cases
In two recent connected cases, Re 1964 Settlement  JRC140B; Re 1964 F Settlement and 1987 F Settlement  JRC142A, the Royal Court of Jersey (Court) expanded the scope of consent that may be given by a court to trustee self-dealing and may also have expanded the scope of the rule against self-dealing itself.
The cases concerned the corporate trustees of a series of trusts with substantially similar terms and governed by English law. Insofar as is relevant, the principal beneficiaries of each were the same, though some remote contingent beneficiaries differed. The trust instruments did not modify the rule against self-dealing.
The trustees had carried out a series of transactions between companies owned by the trusts over a period of several years. They later realised that, as the members of the boards of the trust companies and the members of the board of the corporate trustee itself were the same, these transactions could amount to self-dealing, notwithstanding that they were carried out with a view to maximising the efficiency of the various trust structures in the interests of the common principal beneficiaries. All parties apparently considered that the self-dealing rule was not excluded merely because the parties to the transactions were companies owned by the trusts and not the trustees themselves.
The trustees wished to carry out a further substantial reorganisation, which would likewise amount to self-dealing.
The trustees therefore applied to the Court for specific authorisation of various transactions, but also for an order under s.57 of the UK’s Trustee Act 1925 granting them a general power to self-deal in the future.
The application was supported by the principal beneficiaries and by the protector of the trusts, who had the power to appoint and remove trustees.
The power sought by the trustees was conditional in each case on obtaining appropriate professional advice that the terms of any given proposed transaction were at least as favourable to the beneficiaries as a transaction entered into at arm’s length.
The Court accepted that the proposed transactions would amount to self-dealing. It did not carry out any particular analysis of this point, but rather relied on an English law opinion provided by Nicholas Le Poidevin QC.
The power of the court to confer new powers on the trustees in s.57 is expressed (through s.67) to be exercisable by the English High Court.
The Court found that it could exercise the s.57 power, on the basis that the full application of English law required the court having jurisdiction (here the Jersey Court, since the trustees were resident in Jersey) to have all the powers ascribed to courts by English law.
The Court went on to find that the s.57 power extended to granting a general power for the trustees to self-deal going forward. The power sought by the trustees was duly granted.
In exercising its discretion to grant the power, the Court noted that a power to self-deal was a common power for trustees to have, that it would facilitate a reorganisation that was in the interests of the beneficiaries, and that it included important safeguards (in particular the requirement to seek appropriate professional advice) to protect against abuse.
Whereas previously an application to Court would have to be made every time a self-dealing transaction was contemplated, the expansion of the power under s.57 to include general powers to self-deal allows trustees to make a single application to correct what may be seen as an unnecessarily onerous restriction in a trust deed.
It is also indicative of a more flexible approach to self-dealing generally, since the Court recognised the widespread nature of modifications to the rule and accepted the commercial expediency of making them.
Historically the s.57 power had been understood to extend only to grant powers to effect specific transactions. The 2015 case of Re Portman Estate  EWHC 536 (Ch) held that the words “either generally or in any particular instance” in s.57(1) extended to include authorising general powers, although in that case the powers granted were largely administrative in character. In this case, the use of the s.57 power to grant general powers has been both reinforced and, arguably, extended – while commonly included in trust deeds, the power to self-deal goes to the heart of the fiduciary relationship and is a far more dramatic intervention in a trust than, for example, the power to trade at issue in Portman Estate.
The significance of this extension should not be overstated. The beneficiaries in this case approved the application, which in many cases would be sufficient to authorise a self-dealing transaction in itself. Trustees without this crucial approval, or who seek too unfettered a power, may not be treated so leniently by the Court.
Perhaps more surprising is the Court’s ready acceptance that the transactions at issue amounted to self-dealing. Many professional trustees - who almost by definition serve as trustees of large numbers of trusts - would not necessarily have expected the rule against self-dealing to apply to transactions between underlying companies of multiple trusts of which they were trustee, merely because among the directors of each transacting company was at least one person supplied by the same trust company.
In that respect the case is a cautionary tale – trustees should be mindful of the wide definition given to self-dealing. Though the Court did not explore in detail the question of whether or why the transactions amounted to self-dealing, and the decision may therefore have less relevance as a precedent in that area, trustees should take care to ensure that they have all the necessary authorisations where they are considering transactions between companies underlying separate trusts. Even where there is a power to self-deal in the trust deed, trustees will need to be aware of the risk of self-dealing so that any procedural requirements attaching to the power can be complied with.