Trustees enduring friction and hostility. Should they stay or should they go?
Written by
This is often a difficult question to answer, first, for trustees and secondly for the Court.
Scenario
Take the following scenario. The father is a self-made man. He works extremely hard throughout his life and accumulates significant wealth. He has four children who enjoy a very comfortable upbringing. None of them has his drive and although all profess a desire to work, their incomes are not substantial and sporadic and the father has concerns that, given the option, they would choose a life of leisure and spend freely. Whilst he has bought them all large houses, provides them with allowances to supplement their incomes, and pays their children’s school fees, he is concerned that they would fritter away his wealth after his death were they to have unfettered access to it.
Accordingly, the father places a large part of his wealth in a discretionary trust for the benefit of his children and future generations. He chooses as his trustees two professionals (one a solicitor and one an accountant) who he knows well and trusts. The trustees have unfettered discretion to apply income and capital for the benefit of any beneficiary as they see fit. The father makes clear to the trustees his concerns that his children would fritter away money if they had the opportunity of doing so and he sets out in a Letter of Wishes his wish that the trust funds be used to enable all of the beneficiaries to enjoy a “comfortable, though not extravagant, lifestyle”.
Father dies and one by one the children approach the trustees for increases in distributions to them. Initially, the increases sought are not significant and the trustees are somewhat sympathetic. However, over time the sizes of the distributions sought increase significantly and the trustees become concerned at the apparently lavish lifestyle being lead by the children. Thus, they take a harder line in response to requests for distributions and the children join forces in their approaches to the trustees for greater and greater funds.
The trustees, conscious of the wishes of the settlor, reach a point where they reject the children’s requests to the extent that they consider them excessive. The children instruct solicitors who begin to make enquiries of the trustees in relation to the trust’s affairs. The trustees take their own legal advice and respond as advised. Upon production of trust accounts, the children, through their solicitors, challenge the trustees’ charges and threaten to apply to Court for the charges to be moderated under the procedure adopted in Re Wells [1962] 1 WLR 397. Conscious that their charges would be likely to be reduced on moderation (given their charge-out rates as Central London practitioners), the trustees are advised to offer a reduction in their recent charges on terms that no admissions are made that the charges were not proper. That offer is accepted but the children then begin to suggest that the trustees have been in breach of trust by knowingly overcharging the trust for many years prior to the year in which the charges were agreed to be reduced. The children’s language becomes intemperate as the trustees continue to refuse to accede to their requests for ever greater distributions. The point is reached where the correspondence between the trustees and the children is only conducted through solicitors and the ascertainment by the trustees of the children’s financial position and needs (and also those of the children’s children, who in some cases are approaching majority) becomes extremely cumbersome and time-consuming. The trustees are concerned about the time they are expending in circumstances where allegations of overcharging remain in the background.
Eventually, the children request that the trustees retire and that they be appointed in their place. They say that the appointment of all four of them will ensure equal treatment between their respective families and that as the trust fund comprises a portfolio of stocks and shares which is professionally managed, there is no need for the trust to incur the (they say) considerable cost of having two professionals as trustees.
The trustees are unwilling to accede to the children’s request. They are mindful of the settlor’s wishes and concerned that the interests of future generations need to be protected. Against that, they dislike the accusations being levelled at them by the children and are conscious that they are not charging the trust fees that they would charge in normal circumstances and that their doing so may be perceived to be unfair within their respective firms. They perceive that their fellow partners would consider it in the best interests of their respective firms were they to cease to act.
Thus, the trustees take it upon themselves to make discreet enquiries of other professionals of high standing outside of London, who are familiar with acting as trustees, who would charge less, but who they are satisfied would respect the wishes of the settlor and treat the children fairly as discretionary beneficiaries of a trust established to benefit them and future generations. They identify suitable candidates (again a solicitor and an accountant) who indicate a willingness to act, notwithstanding that they are told in general terms that there is disharmony between the trustees and the children.
The trustees approach the children and say that they will not retire in their favour. They say that there primary position is that they should remain as trustees but that if the children apply to court to seek their removal and the court considers they ought to retire, they will agree to retire in place of the two eminent individuals they identify. They provide full details of the individuals, their practices, and their charge-out rates.
The children apply to have the trustees removed and propose themselves as replacement trustees. They say that the trustees have, in effect, acknowledged that they should retire, that they (the children) do not know the trustees’ proposed replacements, that the trust does not need to incur the cost of two professional trustees, and that the appointment of all of them would ensure the proper and fair administration of the trust for the benefit of them and their individual families.
The law
The starting point when one considers the court’s power to remove trustees from office and appoint new trustees in their place as part of its inherent jurisdiction to supervise the due administration of trusts is the seminal decision of Lord Blackburn in Letterstedt -v- Broers (1883-1884) LR 9 App Cas 371 (an appeal to the Privy Council). Lord Blackburn said, in paragraphs 385-388:
“Story [Story’s Equity Jurisprudence] says, s.1289, ‘But in cases of positive misconduct, Courts of Equity have no difficulty in interposing to remove trustees who have abused their trust; it is not indeed every mistake or neglect of duty, or inaccuracy of conduct of trustees, which will induce Courts of Equity to adopt such a course. But the acts or omissions must be such as to endanger the trust property or to shew a want of honesty, or a want of proper capacity to execute the duties, or a want of fidelity.’
It seems to the Lordships that the jurisdiction which a Court of Equity has no difficulty in exercising under the circumstances indicated by Story is merely ancillary to its principal duty, to see that the trusts are properly executed. This duty is constantly being performed by the substitution of new trustees in the place of original trustees for a variety of reasons in non-contentious cases. And therefore, though it should appear that the charges of misconduct were either not made out or were greatly exaggerated, so that the trustee was justified in resisting them, and the court might consider that in awarding costs, yet if satisfied that the continuance of the trustee would prevent the trusts being properly executed, the trustee might be removed. It must always be borne in mind that trustees exist for the benefit of those to whom the creator of the trust has given the trust estate.
The reason why there is so little to be found in the books on this subject is probably that suggested by [counsel for the appellant] in his argument. As soon as all questions of character are as far settled as the nature of the case admits, if it appears clear that the continuance of the trustee would be detrimental to the execution of the trusts, even if for no other reason than that human infirmity would prevent those beneficially interested, or those who act for them, from working in harmony with the trustee, and if there is no reason to the contrary from the intentions of the framer of the trust to give this trustee a benefit or otherwise, the trustee is always advised by his own counsel to resign and does so. If without any reasonable ground, he refused to do so, it seems to their Lordships that the court might think it proper to remove him…
In exercising so delicate a jurisdiction as that of removing trustees, their Lordships do not venture to lay down any general rule beyond the very broad principle above enunciated, that their main guide must be the welfare of the beneficiaries. Probably it is not possible to lay down any more definitive rule in the matter so essentially dependent on details often of great nicety…”.
But in paragraph 389, Lord Blackburn also said:
“It is quite true that friction or hostility between trustees and the immediate possessor of the trust is not of itself a reason for the removal of the trustees. But where the hostility is grounded on the mode in which the trust has been administered, where it has been caused wholly or partially by substantial overcharges against the trust estate, it is certainly not to be disregarded.”
This passage is quoted time and again by Judges considering applications for the removal of trustees. One can immediately see that there are parts of Lord Blackburn’s judgment that one would wish to rely on where one is seeking the removal of trustees (eg mere human infirmity preventing harmony justifying removal) or alternatively resisting their removal (e.g. friction or hostility of itself not being a reason for removal).
Yet, what can be said with certainty, as Lewison J (as he then was) said in Thomas and Agnes Carvel Foundation -v- Carvel (2007) 4 All ER 81, is:
“The overriding consideration is, therefore, whether the trusts are being properly executed; or, [as Lord Blackburn put it] the main guide must be ‘the welfare of the beneficiaries’.”
Arguments against removal
In the above scenario, the trustees have decided that they should stay. In support of their position, one would imagine that they would submit, inter alia, as follows:
- Generally, they would say that the fact that there existed friction and hostility between them and the children was not enough. It was not preventing the trust from being administered properly. The father chose them as trustees as he trusted them to resist excessive demands made by the children and protect the trust fund for future generations. That is what they are doing. His selection of them should be respected. The appointment of the children, given the wide powers of appointment of capital which exist, would pose a threat to the interests of future generations. The trust fund held very significant assets and the professional charges incurred were reasonable in the context of a trust fund of that size.
- As to case law, in addition to Letterstedt, they would rely upon the decision of Newey J in Kershaw -v- Micklethwaite and others (2010) EWHC 506. Although that case involved an application to remove executors, it had been accepted in Carvel that principles similar to those laid down by Lord Blackburn in Letterstedt should apply to the removal of personal representatives. Newey J said:
“… a testator’s choice of executors is capable of being of relevance, if on no other basis than because the executor may be expected to have knowledge of the characters, attitudes, and relationships involved which a court will lack…it is significant…that there is evidence that Mrs. Kershaw devoted considerable thought to who her executors should be…
In all the circumstances, I have not been persuaded that there is any good reason for any of the defendants to be removed as executors. The matters on which [the claimant] relies do not, either individually or taken together, provide any real basis for supposing that, if the defendants remain as executors, the estate will not be administered satisfactorily, nor that “the welfare of the beneficiaries” (to quote Lord Blackburn’s phrase in the Letterstedt case) calls for a change.”
- They would then go on to rely upon the decision of George Bompas QC, sitting as a Deputy Judge of the High Court, in Alkin and another -v- Raymond and another [2010] ALL ER (D) (48) (May), another case involving an application to remove executors and trustees appointed under a Will. In that case, George Bompas QC said the following in relation to paragraph 389 of Lord Blackburn’s judgment quoted above:”Two points may be made by reference to this passage. First, if the friction or hostility is generated by the behaviour of the “possessor of the trust estate”, the court would need more than just the fact of friction or hostility to be satisfied that the trustees ought to be removed: the court would at least need to be satisfied that the friction or hostility was impeding the proper execution of the trusts and was detrimental to the “welfare of the beneficiaries.
Second, where the friction or hostility is with someone who is merely a discretionary beneficiary, no doubt it will be relevant to form a judgment as to the ability of the trustees to give proper consideration to the claims of that beneficiary, as well as of the other beneficiaries; that that beneficiary is not, after all the “possessor of the trust estate”. In this context [counsel for the defendants] drew attention to the significance of the fact that the defendants had been chosen by Mr. Alkin to be his executors and trustees. As was noted by Ashley J in the Australian case of Monty -v- Delmo [1996] 1 VR 65 (Supreme Court of Victoria) at 75, ‘…the testator’s selection of executors should not likely be set aside. It should not be disregarded except, at the least, for serious reason. That is a relevant matter…both when a question of passing over an executor arises and also where removal of an executor is under consideration’…”
In Alkin, George Bompas QC found that “What, I think, [Mrs. Price, one of the claimants] was doing was to try to find anything she could to build a case against the defendants… It is in my judgment grotesque from Mrs. Price to criticise [a defendant]”.
Accordingly, George Bompas QC refused to remove the executors on the basis of a breakdown in relations (or to put it another way, friction, and hostility) between them and the beneficiaries.
- Finally, the trustees will rely on the decision of the Court of Appeal in Re Estate of Jimmy Savile; National Westminster Bank plc -v- Lucas and others [2014] EWCA Civ 1632, a case in which a beneficiary sought the removal of the Bank as executor. Patten LJ said:”The case was put to the Judge on the basis that relations had broken down between the Bank and the beneficiaries so that they no longer retained confidence in the Bank’s ability to administer the estate…But, as Lord Blackburn indicated, the direct intervention by the court in the administration of a trust or an estate by the removal of the trustee or personal representative has, for the most part, to be justified by evidence that their continuation in office is likely to prove detrimental to the interests of the beneficiaries. A lack of confidence or feelings of mistrust are not therefore sufficient in themselves to justify removal unless the breakdown in relations is likely to jeopardise the proper administration of the trust or estate…
The Judge’s finding that the Bank has acted and will continue to act fairly and with proper regard to the interests of the beneficiaries in its administration of the scheme is therefore in my view determinative [of the removal application being rejected]…”
Arguments for removal
Against the trustees’ submissions, the children would presumably argue, inter alia, as follows:
(a) Adopting the words of Lord Blackburn, “the continuance of the trustees would prevent the trusts being properly executed”. The trusts are not being executed properly at present as the trustees are not even able to maintain a dialogue with the beneficiaries. They only correspond with the beneficiaries through their solicitors and thus fail to understand the needs of the beneficiaries.
(b) The children cannot “work in harmony with the trustees” and thus, following what Lord Blackburn said, the trustees should be advised by their own counsel to resign.
(c) Again, per Lord Blackburn, the “main guide must be the welfare of the beneficiaries” and the welfare of the beneficiaries is not best served by the continuance in office of the trustees. This is a case in which “the hostility is grounded on the mode in which the trust has been administered, where it has been caused wholly or partially by substantial overcharges against the trust estate”, a factor specifically identified by Lord Blackburn.
(d) Although the executors were not removed in the Alkin case because of friction and hostility, they were removed on the grounds of invoices charged to the estate by one of the executors (and approved by the other) which did not “bear scrutiny”. In this case, the trustees have already reduced their charges when faced with an application to court and there is a serious concern that they have been deliberately overcharging the trust in breach of trust for a number of years.
(e) This case has some similarities with the recent case of James and another -v- Williams and others [2015] EWHC 1166 (Ch). That case involved the removal of two professional trustees (one a solicitor and one an accountant) chosen by the testator to be executors of his Will and then trustees of the trusts created by the Will.
Although there was some mention of a potential conflict of interest as regards one of the trustees, there was no evidence of conflict, or wrongdoing by them whatsoever. The beneficiaries of the Will Trusts were the testators daughters and grandchildren. In relation to one trust, a daughter was the life tenant and her children the remaindermen. The trust funds comprised shares in a profitable business and what appears to have been significant proceeds of sale of a property. The estate is described as being “of some considerable value”.
As stated, there was no evidence of wrongdoing by the trustees. Yet, the testator’s family wanted the trustees to be removed and sought the appointment of the two daughters, together with a solicitor who was assisting them with the probate, in their place.
The trustees said: “We are prepared to be replaced upon terms, but primarily because we do not wish to continue in that role if the persistent (unfair and untrue) allegations are made as to our suitability”. They proposed that another solicitor and accountant, who they had identified, be appointed in their place.
As Judge Purle QC, the presiding judge said: “[The case] was heard on relatively limited evidence and without cross-examination, expert evidence or disclosure of anything over and above that which the parties have chosen to put before me. I was invited by both sides to decide, if I could, the removal application, applying the criteria appropriate to a summary judgment application.”
Judge Purle QC held so far as is relevant, inter alia, as follows:
“I agree that a mere loss of confidence in a set of trustees is not enough, but loss of confidence can in turn lead to avoidable conflict and dispute, and therefore to expense which is, of necessity, detrimental to the trust estate…
Modern reality requires the court to take into account the risk of increasing costs when considering issues of administration…
There is, in my judgment, looking at the matter objectively, a justified fear that it would prove to be too costly to retain or appoint two professional trustees of different albeit complimentary disciplines rather than the counter-suggestion of two individuals who are already beneficiaries (and who will not charge anything) assisted by an experienced probate solicitor who is already acquainted with the dynamics of the family, and the position of the company, and in whom the family beneficiaries have confidence.
These considerations in my judgment justify the court’s intervention, given also the additional factor that, for good reason or bad, that is what the family wants…
The appointment, or continuation in office, of trustees, against the wishes of beneficiaries, who are perceived as being in a position of potential conflict brings in another level of litigation risk, with an attendant substantial increase in costs.
I have already said that, in my judgment, the administration of these trusts is likely to benefit if the family assets are held by the two family members with the assistance of their chosen probate solicitor rather than in the hands of two professionals of different albeit complimentary disciplines, who will attract greater charges than the assistance that is likely to be needed from the solicitor, and who in the event that the new professionals are appointed will require to read into the background and familiarise themselves with the estate and family dynamics…
The appointment of two professional trustees therefore brittles with cost consequences…
Trusts, it can be said generally, are better administered in an atmosphere of harmony, not disharmony. In my judgment, the better chance of harmony, in this case, is achieved by appointing the family members, with a probate solicitor of their choice, as trustees rather than anyone else. That is also likely to be significantly cheaper than the appointment of two professionals of different albeit complimentary disciplines. In those circumstances, I exceed to the application to appoint [the two family members] new trustees.”
Thus, as can be seen, Judge Purle QC said a great deal that on the face of it may be of considerable assistance to the children.
The decision
One could understand a judge reaching any of the three options open to him:
(i) reject the removal application on the basis that he/she is satisfied that the trustees will continue to administer the trust fairly for the benefit of the beneficiaries as a whole;
(ii) remove the trustees and appoint the two nominated professionals in their place on the basis that: friction and hostility is hampering the proper administration of the trust; the change of personalities and reduction of charges ought to remove much of the friction and hostility; the wish of the settlor for there to be professional trustees ought to be recognised; and the size of the fund and the protection of the interests of future generations justifies the appointment of professional trustees as opposed to the children; or
(iii) remove the trustees and appoint the children in their place on the basis that only by doing that will harmony be achieved as the children are likely to be hostile to the replacement trustees and their charges and the appointment of all four of the children ought to provide sufficient protection against the risk of dissipation of the trust’s assets to the detriment of future generations.
