Summary

The English Court has taken the exceptional step of intervening to exercise a discretionary power where deadlocked trustees could not reach unanimity. The case of AB v CD provides useful authority for trustees who face the unenviable task of fulfilling their fiduciary duties in the face of intransigent co-trustees.

There has long been a question over the circumstances in which the court will assist deadlocked trustees. The case of AB v CD sheds light on this issue in the context of a long-standing disagreement between a professional trustee (represented by BCLP) and his lay co-trustees in relation to the distribution of funds held on discretionary trust.

Factual background

The professional trustee brought an application seeking the court’s directions in relation to the winding-up of a discretionary fund created under a will. All of the trustees were agreed that the trust funds should be distributed and the fund wound-up to avoid ongoing administrative costs. The disagreement arose regarding how the funds should be distributed as between the discretionary beneficiaries being the six grandchildren of the testator. Specifically, the lay trustees took the view, on moral grounds, that two of the grandchildren should receive only a minimal sum because of their alleged conduct towards the testator and his wife. The professional trustee considered that the views of his co-trustees were coloured by personal hostility towards the two grandchildren and could not agree to exercise his discretionary powers as they proposed.

The problem

The professional trustee found himself in an impossible position: he could not accede to the wishes of his co-trustees, who were not conducting themselves in a “trustee-like manner”; nor could he retire in circumstances where his retirement might facilitate an intended breach of trust. His co-trustees would not surrender their discretion to the court and it is well-established that where trustees have a discretionary power, “the court will not restrain or compel the trustees in the exercise of that power, provided that their conduct is informed, bona fide and uninfluenced by improper motives…”.

Short of taking the drastic step of seeking his co-trustees’ removal, the professional trustee found himself at a loss as to how to proceed.

With costs mounting on the issue, the professional trustee applied to the court for directions.

Authority on intervention

In response to the application, the lay trustees argued that the court was not entitled to intervene in the exercise of the trustees’ discretionary power of appointment. They relied on academic authority that “there is no deadlock merely because the trustees… cannot agree: the power in such a case remains unexercised” and “the court does not dictate to trustees how to exercise their powers..”.   

Master Price acknowledged these principles but, in the final analysis, he was persuaded by the professional trustee that there was “ample authority” that the court should intervene to compel the exercise of the trustees’ power in “special circumstances”. The present case was characterised by exactly such special circumstances.

The court’s pragmatic solution

Having given the trustees a final opportunity to reach agreement between themselves, the court ultimately decided to take matters into its own hands. Master Price determined that the time had come for the court to “grasp the nettle” and exercise the discretionary power on behalf of the trustees who had demonstrated themselves incapable of agreement.

In his judgment, Master Price set out the “special circumstances” of the case which made it appropriate for the court to intervene. In particular, he pointed to the fact that the defending trustees would not surrender their discretion to the court in circumstances where there was common ground that the trusts should be wound-up. However, the decisive factor appeared to be the significant costs being generated by the disagreement and the need for the court to cut the “Gordian Knot” to bring the accruing costs to an end.

Commentary

This case is a salutary tale of the cost of intransigence, but it is also a reassuring example of the court’s willingness to take a pragmatic approach in the exercise of its inherent supervisory jurisdiction over trusts. In plain terms, this case provides a clear warning to trustees that if they cannot act together reasonably their powers will be confiscated.

AB v CD [2019] EWHC 2323 (Ch)

AB v CD [2019] EWHC 2324 (Ch)