Representation of X Trust Limited in the matter of Q Trust and R Trust

Trust. [2024]JRC118 Royal Court (Samedi) 22 May 2024 Before : A. R Binnington, Esq., Commissioner, and Jurats Ronge and Austin-Vautier Between X Trust Limited Representor (1) A (2) B (3) C (4) D (5) E (6) F (7) G (8) H (9) I (10)J (11)K (12)L (13)M (14)N (15)O (16)P Respondents

IN THE MATTER OF THE REPRESENTATION BY

X TRUST LIMITED

AND IN THE MATTER OF Q TRUST

AND IN THE MATTER OF R TRUST AND IN THE MATTER OF ARTICLE 51 OF THE TRUSTS (JERSEY) LAW 1984 (AS AMENDED) Advocate J. P. Speck for the Representor Advocate W. A. F. Redgrave for the Second to Seventh Respondents Advocate L. A. Woolrich for the Eighth and Ninth Respondents Advocate D. Evans for the Minor Beneficiaries as Guardian Ad Litem judgment in private the commissioner: 1. On 12 February 2024, we sat to hear an Application by the Representor, X Trust Limited ("X Trust" or "the Trustee"), as trustees of the Q and R Trusts (together "the Trusts"), for the Court to bless a momentous in-principle decision by the Trustee to terminate the Trusts and to distribute the assets to certain beneficiaries in accordance with a step plan ("the Step Plan"). The original trustee of the Trusts was Y Trustees Limited ("Y Trustees"). On [Redacted] X Trust merged with Y Trustees, the result being that X Trust continued as the merged survivor company and hence continued as trustees of the Trusts.

2. A similar application had been made at a hearing on 16 March 2023 (“the 2023 Hearing”) but on that occasion, for reasons set out in a judgment reported as Representation of X Trustees Limited v. D and E Trusts [2023] JRC 075 (“the 2023 Judgment”) we declined to bless the Trustee's decision. At the conclusion of that hearing, we indicated to the Trustee that we would be prepared to entertain a further application should they decide to re-visit their decision in the light of our ruling. This they subsequently did at a meeting held on 11 December 2023 (“the December Meeting”) in respect of both of the Trusts and which was the subject of a detailed and lengthy minute (“the December Minute”). The Trustee subsequently applied to the Court for its blessing of the decision reached at that meeting.

3. The Trustee initially sought the Court’s approval of: (i) The Trustee’s decision to allocate the assets of the Trusts in equal, one-quarter proportions to [Redacted] (together, “the Recipient Beneficiaries") (“the Allocation Decision”); (ii) The Trustee’s decision to (1) wind up and dissolve the underlying entities of the Trusts; and (2) terminate the Trusts (“the Liquidity Decision”); (iii) The Trustee’s decision to make terminating distributions of the assets of the Trusts in equal, one-quarter proportions to the Recipient Beneficiaries as one or a combination of (1) cash; (2) receivables; or (3) an equity interest in a [Redacted] company held in the Trusts, [Redacted] (“Red Co”), subject to any non-cash distribution being adequately and appropriately secured (“the Implementation Decision”).

4. On 12 February 2024, we approved the Allocation Decision and the Liquidity Decision, but during the course of the hearing Advocate Speck, for the Trustee, requested us to postpone consideration of the application in respect of the Implementation Decision.

5. As with the earlier application we agreed that the hearing would be held in private, and any detailed judgment redacted in order to protect the interests of the parties to the proceedings.

6. The following are the detailed reasons for our decision. 7. [Redacted] 8. [Redacted] The Court’s concerns in relation to the first in-principle decision 9. In the 2023 Judgment we set out three reasons why we did not feel able to bless the Trustee’s in-principle decision.

10. First, a potential conflict of interest on the part of the Trustee, arising from its execution of the “Settlement Agreement”, as defined in the 2023 Judgment. [Redacted] 11. [Redacted] 12. In the 2023 Judgment we expressed the view that if indeed there was a potential conflict it was unlikely to be a conflict that was so pervasive as to disable the Trustee from taking the decision and thus require them to surrender their discretion to the Court, but it was one that needed to be addressed. We did not regard it as sufficient for the Trustee merely to state that the Settlement Agreement had been superseded by the Step Plan. We held that it should have set out its reasons why the alleged conflict did not exist, supported, if necessary, by advice that the mutual obligations in the Settlement Agreement had fallen away and, if they had not, explaining why, notwithstanding the existence of a potential conflict, it was nevertheless in the interests of the beneficiaries to reach the in-principle decision.

13. Second, the failure by the Trustee to consider a worst-case scenario in relation to the [Redacted] tax liabilities (“the Worst-case Scenario”). Given that any cash in the structure was first to be utilised in paying tax, a higher tax liability could have disadvantaged a beneficiary who was taking their distribution in cash more than those who were taking it in shares. In our view the Trustee should have identified the potential maximum quantum and considered what impact that might have on the Step Plan.

14. Third, the failure by the Trustee to satisfy itself that the valuation was independent and objective. In our view a reasonable trustee would not have relied, without further enquiry, on a valuation produced for one group of beneficiaries whose interests in the outcome differed from those in another group.

15. The Eighth Respondent argued that the Court was not at this hearing restricted to considering whether its previous concerns had been addressed. The Eighth Respondent submitted that in determining the Trustee's application, the Court should review the intended decision afresh and holistically, taking into account all relevant considerations, including new information or concerns that had come to light. We agree that we are not confined simply to reviewing how the Trustee has addressed our previous concerns and we have therefore considered the further criticisms that the Eighth Respondent has made of the decision of the Trustee. Steps taken by the Trustee to address the Court’s concerns (i) The Trustee’s participation in the Settlement Agreement 16. The December Minute records that subsequent to the 2023 Judgment the Trustee entered into discussions with the counterparties to the Settlement Agreement with a view to addressing the Court’s concerns. The result was an amendment agreement (“the Amendment Agreement”) that deleted and disapplied certain terms of the Settlement Agreement, deleted and restated others and effected other consequential amendments. 17. [Redacted] 18. Following the execution of the Amendment Agreement the Trustee commissioned advice from their legal advisers, Mourant, to consider (1) whether a potential conflict existed, or had existed, as a result of the Trustee's entry into the Settlement Agreement; (2) if a conflict existed or had existed, whether it was a manageable or terminable conflict; and (3) whether the steps now taken by the Trustee (by entering into the Amendment Agreement) were effective in managing or terminating any potential conflict.

19. Mourant's conclusion was that the potential conflict that could previously have been said to exist had been effectively and definitively managed through its termination by way of the Amendment Agreement. (ii) The Worst-case Scenario 20. The Trustee recognised that tax was central to the issues faced by both the Trustee and the beneficiaries. The Trustee, and therefore the Trusts, faced an inevitable and very significant tax liability. The precise quantum of that liability was, at this stage, uncertain, but it was certain (1) that a liability would be imposed; (2) that that liability would be very significant; and (3) that it would be demanded (and enforced) in the near future. 21. [Redacted] 22. We accept that the principal difficulty faced by the Trustee, in particular in relation to the Allocation Decision, is that it is difficult, if not impossible, to know at this time, the stage at which it must decide the proportions in which the beneficiaries will benefit, what the ultimate tax liability will be, or whether, and to what extent, the allocations upon which it decides will impact the quantification of that tax liability. The Trustee is therefore being forced by the Revenue Authority’s stance to make a decision without knowing (or being able to know) its precise outcome. That unavoidable uncertainty of outcome has, perhaps unsurprisingly, led to disagreement amongst the

parties, in terms of what the range of outcomes is, what the relevant factors bearing on the outcome might be, and which outcome is most likely. 23. [Redacted] [Heading Redacted] 24. [Redacted] 25. [Redacted] 26. [Redacted] 27. [Redacted] 28. [Redacted] 29. [Redacted] 30. [Redacted] (iii) Lack of independent valuation 31. In the 2023 Judgment we noted that the Trustee had relied upon a valuation of Red Co carried out by A Valuers which was described by the Trustee as being an "independent valuation". [Redacted] 32. Following the Court’s comments in the 2023 Judgment the Trustee engaged A Valuers directly to provide a valuation of Red Co [Redacted]. The Trustee expressed itself to be confident that A Valuers was independent and objective, suitably qualified, and appropriately placed to provide the valuations required. The Trustee was also satisfied that the terms of its engagement were apt to procure the valuations needed.

33. In addition, the Trustee obtained a separate liquidation valuation of Red Co from B Valuers, which has confirmed A Valuers' conclusions within the valuation range found by A Valuers. The Trustee also instructed A Valuer to liaise with the Eighth Respondent's valuation adviser, C Valuer. Although it would appear that C Valuer's instruction “faltered” before a final conclusion the Trustee nevertheless took into account his comments on the A Valuer valuation. [Heading Redacted] 34. [Redacted] 35. [Redacted] 36. [Redacted] 37. [Redacted] 38. [Redacted] 39. [Redacted] 40. [Redacted] 41. [Redacted] 42. [Redacted] 43. [Redacted] 44. [Redacted] 45. [Redacted] 46. [Redacted] 47. [Redacted] The position of the Second to Seventh Respondents 48. Advocate Redgrave, on behalf of the Second to Seventh Respondents, agreed that this was not a case where the Trustee had to surrender its discretion: the Trustee considered that it was not suffering from any conflict and that it was in a position to decide (a) to distribute the assets, and (b) how to do so. The Court's role was therefore to determine whether the Trustee had made its decision properly, and that it was within the range of reasonable decisions.

49. The Second to Seventh Respondents supported the Trustee's in-principle momentous decision to distribute the assets equally between the Recipient Beneficiaries. They considered that it was no longer in the beneficiaries' interests for the Trusts to continue. They noted that the Eighth Respondent shared that view, having noted that "something needs to be done” but that they did not support the Trustee's decision and maintained a number of concerns regarding the Trustee's decision-making process. The Second to Seventh Respondents stated that they would co-operate with the Trustee to facilitate and effect the Trustee's decision should the Court provide its blessing. The position of the Guardian 50. Advocate Evans, as Guardian ad litem for the minor and unborn beneficiaries, recognised that the Trustee found itself in a difficult position, and that it had done so since 2019, if not before.

51. On behalf of the minor and unborn beneficiaries, the Guardian had endeavoured to identify and comment on those matters arising from the in-principle decision which most directly affected those interests.

52. He recognised that the appointment of all of the assets of the Trusts to the Recipient Beneficiaries and thus the termination of the Trusts, brought to an end the ability of the minor beneficiaries (and future generations) to be considered for benefit by the Trustee, which would not, prima facie, be in their interests. However, he submitted that the tax position appeared to be such that the Trusts no longer served any real purpose in any event, meaning the need to bring them to an end was clearer. It was also important that the wider family should be able to move forward independently of each other such that each branch of the family had sufficient wealth for themselves and their respective heirs. 53. [Redacted] 54. [Redacted] 55. The Guardian endorsed the view that something needed to be done with respect to the Trusts, and agreed that the present situation could not be allowed to continue indefinitely: if the future of the Trusts was not resolved soon, then all that was likely to result was the incurring of further substantial costs and yet further uncertainty as to tax.

56. He fully endorsed the underlying principle of what the Trustee was seeking to achieve and encouraged all family members to seek to find an agreement that worked for each of them. [Redacted] The test for approving momentous trustee decisions 57. As we noted at paragraph 25 of the 2023 Judgment, the law in relation to the Court's blessing of a momentous decision is well-established and was conveniently summarised by the Jersey Court of Appeal in Kan v HSBC International Trustee Limited [2015] (1) JLR Note 31; Representation of Otto Poon Trust [2015] JCA 109, at paragraph 14 of its judgment, in the following terms: "Where a trustee has made a momentous decision, that is a decision of real importance for the trust, and seeks the Court's approval for the decision, the legal test to be applied by the Court is well established in this jurisdiction. As explained in Re S Settlement [2001] JLR N 37, the Court must satisfy itself (i) first, that the trustee's decision has been formed in good faith, (ii) second, that the decision is one which a reasonable trustee properly instructed could have reached; and (iii) third, that the decision has not been vitiated by any actual or potential conflict of interest..." Our decision 58. Although we have reviewed the manner in which the Trustee has dealt with the concerns expressed by the Court in the 2023 Judgment, we have not confined ourselves to such a review but have considered the Trustee’s in-principle decisions afresh.

59. The steps taken by the Trustee, to which we have referred above, to deal with our concerns in relation to the Red Co valuation, the participation of the Trustee in the Settlement Agreement and the Trustee’s consideration of the Worst-case Scenario are, in our view, sufficient to allay those concerns.

60. The stance taken by the Revenue Authority, a matter over which the Trustee has no control, has put the Trustee in a difficult position. The Trustee does not have the luxury of identifying and quantifying the tax liabilities before it makes its decisions. It can only identify and consider a range of possible outcomes in relation to tax, which is indeed what it has done. 61. [Redacted] 62. [Redacted] 63. [Redacted] 64. [Redacted] 65. We recognise that the Trustee had a difficult decision to make, complicated by the uncertainty as to the eventual outcome of negotiations with the Revenue Authority. A decision as to distribution of the Trusts’ assets on termination of the Trusts is inevitably a significant decision and where there is disharmony between family beneficiaries it is unlikely that the decision will receive universal approval. The decision-making process is a balancing exercise of factors which may pull in opposing directions. Different trustees might well come to different conclusions in respect of the same set of facts. The tax consequences in a case such as the present will clearly be an important factor but so also will be the individual needs of the beneficiaries, which it is clear the Trustee has considered. Against that backdrop there is also the consideration of what is “fair” and in the present case we see no reason why the Trustee should not have taken into account the source of the family wealth and recognised that factor by deciding, as they have done, to make a distribution of a part of the assets to the Second Respondent.

66. In the circumstances set out above we concluded that the decision to allocate the assets of the Trusts in equal one quarter proportions to the Recipient Beneficiaries was one that had been formed in good faith, that it was one which a reasonable trustee properly instructed could have reached and that it had not been vitiated by any actual or potential conflict of interest.

67. We were, on the same basis, prepared to approve the Trustee’s decision to wind up and dissolve the underlying entities of the Trusts and to terminate the Trusts. 68. [Redacted] 69. [Redacted] 70. [Redacted] Authorities X Trustees Limited v. D and E Trusts [2023] JRC 075. Kan v HSBC International Trustee Limited [2015] (1) JLR Note 31. Representation of Otto Poon Trust [2015] JCA 109.