Trusts & Trustees

Russell,, David;Graham,, Toby

doi: 10.1093/tandt/ttz027pmid: N/A

Strangers to the trust cannot be provided with confidential trusts documents and information. Insiders can be said to be in a privileged position. The question in Schmidt v Rosewood Trust Limited1 was whether the appellant, Vadim Schmidt, was a stranger or an insider in relation to the Angora Trust and Everest Trust. Vadim claimed to be an insider on the basis of his ‘discretionary interests’ in the trusts and his role as the administrator of his father’s estate. Whilst his ‘discretionary interests’ have received much attention, much less has been paid to the second basis which is why we consider it in this editorial. We start by examining Vadim’s standing based on his discretionary interests. Vadim’s personal interest in the Trusts It was accepted by all concerned that Vadim was not within the class of beneficiaries of either trust.2 This was not the end of the matter because the Everest Trust conferred a power on trustees to add to the class of beneficiaries ‘any person or persons or class or classes of person (including an individual then unborn) or charity’. A letter of wishes provided by Vitali Schmidt, Vadim’s father, stated ‘it would be my wish if I were to die prior to the termination of the trust that my share of the trust property be given to Vadim Schmidt’. Lord Walker concluded, in the light of this, ‘as regards the Everest Trust, the appellant is a possible object of a very wide power in clause 3.3 … but an object who may be regarded (especially in view of the Everest letter) as having exceptionally strong claims to be considered’. There was no equivalent power in the Angora Trust to add persons to the class of beneficiaries with the result that Vadim could never be an object of that trust. Standing as administrator of Vitali’s estate Since Vadim had no ‘discretionary interest’ in the Angora Trust, his standing to seek disclosure of the trustee can only derive from his role in relation to his father’s estate. By way of background, the father (Vitali) was considered to be one of the economic settlors of the Angora Trust. He was also one of its beneficiaries; as such the trustee had caused him to receive ‘substantial distributions’. The Privy Council explained why these matters provided Vadim with standing as follows: (1) It seems to be common ground that during Mr Schmidt’s lifetime substantial distributions were made for his benefit, all or most by allocation of funds to the two companies (Gingernut and Petragonis) which were regarded as being (in some sense) Mr Schmidt’s. The appellant as Mr Schmidt’s personal representative does not accept that these funds have been fully accounted for. His contention is that in respect of allocated funds Mr Schmidt ceased to be a mere discretionary object, and became absolute owner. On the face of it the appellant (as personal representative) seems to have a powerful case for the fullest disclosure in respect of these funds. (2) The appellant as personal representative would also, on the face of it, have a strong claim to disclosure of documents or information relevant to the issue whether, but for breaches of fiduciary duty (such as for instance overcharging) more funds would have been available for distribution to Mr Schmidt, and would or might have been allocated to him in practice. The Board express no view whatever as to whether the appellant has a case for overcharging or any other breach of fiduciary duty. But claims of that sort have been put forward in the 1998 proceedings, and the possibility must be noted in order to make the position clear.3 On conventional principles his role as administrator only assists Vadim if the Angora Trust conferred a fixed interest which survived death or the Angora Trust was invalid or his father retained a beneficial interest in property transferred to the Angora Trust. Did the Angora Trust confer a fixed interest? Lord Walker approached the Angora Trust as being a discretionary trust. This was on the basis that Clause 4(1) conferred ‘a wide power of appointment exercisable by the trustees, with the prior written consent of the protector. The objects of the power are all or any one or more of the beneficiaries’ (emphasis added).4 The problem was with Clause 4(2) of the Angora Trust that provided: Upon the death of any beneficiary the trustee shall hold that portion of the trust fund to which the deceased beneficiary had been entitled during his lifetime upon trust for such person or persons as the deceased beneficiary had notified the trustee in writing and in the absence of such notification for such person or those persons whom the trustee believes to be the closest surviving relative or relatives of the deceased beneficiary (emphasis added). The highlighted passage from Clause 4(2) is inconsistent with the wide power of appointment in Clause 4(1). Vadim relied on Clause 4(2) (and a version of the second schedule discovered amongst his father’s papers with manuscript notation suggesting that his father was thought to enjoy a fixed interest in the Angora Trust5) to submit ‘that each of the putative settlors should be regarded as having been in some sense entitled to the funds which he caused to be brought into the settlement, and that this enabled Clause 4(2) to be given sensible meaning’.6 Lord Walker was unable to decide the construction point because other potentially affected parties were absent and because there was no evidence of the surrounding circumstances (or ‘matrix of fact’) in which the trust was made. Lord Walker merely described Vadim’s construction as arguable. He acknowledged that it involved some violence to the language of the clause and came up with an alternative construction which avoided this, namely that Clause 4(2) only applied in the event that the trustees exercised their power of appointment under Clause 4(1) to confer a fixed entitlement.7 However, Lord Walker stated that Vadim’s construction might be preferable to disregarding Clause 4(2) completely. To do so, he suggested, would run counter to the modern approach (reflected in the House of Lord’s decision in Re Gulbenkian’s Settlements8) that ‘the court is not to reject any part of a legal document as meaningless without first trying hard to give it sensible meaning’. Whatever the merits of Vadim’s construction argument, Lord Walker noted that ‘unless and until [Vadim] takes that course and succeeds in his argument it cannot be assumed that [he] in his personal capacity is a beneficiary (in any sense) under the Angora Trust’.9 Was Angora Trust invalid or had Vitali parted with beneficial ownership of assets? This meant that the father did not have a fixed interest and thus did not have any entitlement to disclosure. How then could Vadim’s role as administrator be relevant? Applying usual principles, the only way that this could assist would be in the event that the trust was invalid and property resulted back to Vitali as settlor, or that Vitali never parted with beneficial ownership of the assets transferred to the Angora Trust. There appear to be tantalizing hints at these possibilities. For instance, in relation to the arguable inconsistency between Clauses 4(1) and 4(2), Lord Walker concluded that those involved in its creation ‘had an inadequate understanding of its effect’. Rosewood’s own evidence described its role as ‘simply to receive and pay out such funds as [Vitali] chose to channel through the Isle of Man’.10 Distributions from the Angora Trust seem to have come from a company called Gingernut Ltd. It is described as ‘being (in some sense) Mr Schmidt’s’11 whilst at the same time being one of ‘the principal vehicles for the distributions … from the Angora Trust’,12 implying that Gingernut Ltd was within the Angora Trust and under the control of its trustees. The inconsistency between Gingernut being (‘in some sense’) Vitali’s whilst at the same time being a trust asset is not explained. Further, Vitali’s enjoyment of benefit from the trusts does not seem to have died with him. The Privy Council record that ‘sums totalling about US$14.5 mil had been paid to [Vadim] (as his father’s administrator) between August and October 1998’13 (Vitali died in August 1997, over a year before these payments were made). Apart from saying payments from the Angora Trust derived from Gingernut Ltd,14 little or no explanation is provided as to the basis on which these post death payments were made. Instead of grappling with these issues, Lord Walker simply notes: that is only a brief summary of the background to the litigation. It has many features which might be thought to prompt further questions. However, neither side has suggested that the settlements should be regarded as sham documents, or as documents entered into for illegal purposes. It is unnecessary to try to go further, at this stage, into the origins of the settlements. With this he proceeded on the basis that the Angora Trust was valid. In contradistinction with the denunciation in Pitt v Holt15 of tax planning that was incompatible with good citizenship (which might be a reason for equity to withhold its assistance), Lord Walker considered that assistance should be provided to Vadim. He explained: The Board have to consider what rights or claims to disclosure the appellant has, either personally or as his father’s personal representative, under two badly-drafted settlements whose terms have been moulded by the sort of influences mentioned above. One possible reaction would be that Mr Schmidt and his colleagues have made their bed and they must lie on it; if they have deliberately entered into a web of camouflage, it is hardly for anyone claiming through them to complain that the position is not transparent. As Lord Greene MR observed, giving the judgment of the court in Lord Howard de Walden v IRC [1942] 1 KB 389 at 397, [1942] 1 All ER 287 at 289 if a taxpayer plays with fire it scarcely lies in his mouth to complain of burnt fingers. However, the Board consider that that inclination must be resisted. As already noted, it has not been suggested that the settlements are shams, or tainted with illegality. It is fundamental to the law of trusts that the court has jurisdiction to supervise and if appropriate intervene in the administration of a trust, including a discretionary trust. As Holland J said, in the Australian case of Randall v Lubrano (unreported) 31 October 1975, cited by Kirby P in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, 416: ‘no matter how wide the trustee’s discretion in the administration and application of a discretionary trust and even if in all or some respects the discretions are expressed in the deed as equivalent to those of an absolute owner of the trust fund, the trustee is still the trustee’.16 Whilst it is not at all clear from Lord Walker’s judgment, it would seem that the basis for considering that Vadim had standing to seek disclosure is that fiscal changes have resulted in a transformed international trust landscape that Lord Eldon would have found unrecognizable.17 One development in trust drafting arising out of these changes is that the interests or expectations of the ‘true intended beneficiaries’ were often ‘not clearly identified’ in the instrument creating the trust and, indeed, were ‘often barely perceptible’.18 This meant that it was possible that Vitali or Vadim were intended to have some interest beyond what was recorded on the face of the trust paperwork. This possibility coupled with the unattractiveness of there being no one in a position to police the trustee of the Angora Trust can be the only basis for considering that disclosure should be provided. This obviously does not accord with the recent insistence of the Supreme Court and Court of Appeal on conventional construction principles to discern the scope of powers and trusts.19 Moreover, there must be some question as to whether this provides a sufficient basis for the Court to exercise its supervisory jurisdiction, which surely should rest on clear and established principles. Footnotes 1. [2003] UKPC 26. 2. As to the Angora Trust, para [11(1)] of the judgment states the beneficiaries of the Angora Trust were defined as the Royal National Lifeboat Institution and ‘persons listed in the second schedule’ (which named Vitali Schmidt and other Lukoil executives). The beneficiaries of the Everest Trust are described in para [16(1)] of the judgment as ‘any person or charity added under clause 3’ and those named in a second schedule. The judgment simply states that the second schedule was ‘never included in the deed but the names of Lukoil senior executives were added in manuscript at the end of the deed’. This manuscript list included Vitali Schmidt’s name. 3. Schmidt (n 1) [68]. 4. ibid, [12(1)]. 5. ibid, [18]: An unredacted copy of the Angora Trust found by the appellant with his father’s papers shows that the second schedule originally contained eight names. Mr Schmidt’s [Vitali's] name was followed by the words ‘as to a three-tenth share (30%)’. Each of the other seven names were followed by the words as to a one-tenth share (10%)’. All the references to fractional shares were crossed through (but so as to remain legible). In addition, four of the names had been crossed through, and one further name had been added in manuscript (without any reference to a share). 6. It is notable that Mr Steinfeld QC, for Vadim, suggested that the alternative to this analysis: would be that the settlement would become a sort of tontine for the longest-living settlor, an absurd result that cannot have been intended. The absence of an identified default beneficiary of the Angora Trust—which gives rise to this argument—is a powerful example of the sorts of issues discussed in Lionel Smith’s article in this issue on ‘massively discretionary trusts’. 7. Schmidt (n 1) 13: unless and until the trustees have exercised their power of appointment under clause 4(1) in such a way as to give any beneficiaries a fixed entitlement (for instance, a life interests in some fraction of the trust fund) the reference to ‘that portion of the trust fund to which the deceased beneficiary had been entitled during his lifetime’ is inapposite. 8. [1968] UKHL 5. 9. Schmidt (n 1), para [32]. 10. ibid, [8]. 11. ibid, [68(1)]. 12. ibid, [17]. 13. ibid, [6]. 14. ibid, [17] describes Gingernut Ltd as ‘the source of the sums distributed to the appellant, as Mr Schmidt’s personal representative, in 1998’. 15. 2013 UKSC 26 at [135] 16. Schmidt (n 1) [36]. 17. ibid, [43]. Counsel have very properly referred the Board to a considerable number of authorities, some of them going back to the early years of the 19th century. It is appropriate to reflect that during the long period covered by these authorities (but especially during the second half of the 20th century) the forms and functions of settlements have changed to a degree which would have astonished Lord Eldon. By the 1930s high rates of personal taxation led some wealthy individuals to make settlements which enabled funds to be accumulated in the hands of overseas trustees or companies: see for instance Lord Vestey’s Executor v Inland Revenue Comrs [1949] 1 All ER 1108. This practice increased enormously with the introduction of capital gains tax in 1965. But increasingly stringent anti-avoidance measures encouraged legal advisers to devise forms of settlement under which the true intended beneficiaries were not clearly identified in the settlement. Indeed their interests or expectations were often barely perceptible. Rarely did a beneficiary take an indefeasibly vested interest with an ascertainable market value. Tax avoidance is therefore one element which has strongly influenced the forms of settlements; and once the offshore tax-avoidance industry has acquired standard forms its inclination is to use them, subject perhaps to some more or less skilful adaptation, even for clients whose aim is not to avoid United Kingdom taxation. See also para 1 of the judgment: It has become common for wealthy individuals in many parts of the world (including countries which have no indigenous law of trusts) to place funds at their disposition into trusts (often with a network of underlying companies) regulated by the law of, and managed by trustees resident in, territories with which the settlor (who may be also a beneficiary) has no substantial connection. These territories (sometimes called tax havens) are chosen not for their geographical convenience (indeed face to face meetings between the settlor and his trustees are often very inconvenient) but because they are supposed to offer special advantages in terms of confidentiality and protection from fiscal demands (and sometimes from problems under the insolvency laws, or laws restricting freedom of testamentary disposition, in the country of the settlor’s domicile). The trusts and powers contained in a settlement established in such circumstances may give no reliable indication of who will in the event benefit from the settlement. Typically it will contain very wide discretions exercisable by the trustees (sometimes only with the consent of a so-called protector) in favour of a widely-defined class of beneficiaries. The exercise of those discretions may depend on the settlor’s wishes as confidentially imparted to the trustees and the protector. As a further cloak against transparency, the identity of the true settlor or settlors may be concealed behind some corporate figurehead. 18. ibid, [34]. 19. Toby Graham and David Russell, ‘Letters of Wishes and Understanding the Purposes of a Trust’ (2019) 25(3) Trusts & Trustees 277. © The Author(s) (2019). Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)

doi: 10.1093/tandt/ttz028pmid: N/A

Editorial Schmidt v Rosewood Trust Limited revisited David Russell AMQC, Toby Graham Articles The charitable trust: not so special after all? Jonathan Fowles In Lehtimaki v Children’s Investment Fund Foundation (UK) (‘CIFF’), the Court of Appeal was right to decide that the Chancellor had been wrong to seek to control a charity fiduciary’s discretion absent actual or threatened breach of fiduciary duty. This decision ought to be welcomed as setting historically sound and principled limits on the tendency to regard charitable trusts as calling for exceptional treatment. Private purpose trusts—a statutory scheme for validation Mark Pawlowski The article seeks to advocate a change in English law by the introduction of a statute validating private purpose trusts along the lines of the legislation already in force in several offshore jurisdictions. It considers the various elements of any such new statute with particular reference to the definition of a private purpose trust, the mechanism of an enforcer, the subject of perpetuities, the definition of purpose, the type of trust instrument, the nature of determining events, the definition of default beneficiaries and trustees, and the problem of disclosure. In depth Massively discretionary trusts Lionel Smith Trust drafting practices have changed dramatically in recent decades. A range of considerations has led to an increase in the dispositive discretions held by trustees. In some cases, the trustees’ dispositive discretions effectively govern the whole trust structure, leading to what the author calls a ‘massively discretionary trust’. These trusts create a series of legal risks. These include the possibility that the trust property is held on resulting trust from the moment of the trust’s constitution and the possibility that the beneficiaries can collapse the trust and take the trust property. Some drafting techniques may be based on a misunderstanding of the law; some may invite litigation; and the governing legal principles, as understood by some drafters, may be subject to revision and refinement by the courts. This article will examine some of these possibilities using concrete examples. Forming financial intermediaries into a fifth column: the OECD MDRs for CRS avoidance Paul F. Millen and Peter Cotorceanu The professional plight of fiduciaries, lawyers, accountants, and other advisors who aid their clients in minimizing their tax burden rarely turns a dry eye wet. Even where the activities are legitimate under the law or sanctioned by the tax authority, many neutral minds (giddied in part by politicians and journalists) cannot shake the intuitive sense that the rich ought to pay more tax, even if they do not have to. The prevailing view is that where sufficient wealth couples with the will to avoid taxes, the financial intermediary finds a way. Accordingly, few hearts will tremble at the predicament confronting fiduciaries and tax advisors from the incoming intermediary common reporting standard avoidance disclosure rules. By detaching the interests of the intermediary from those of the client, however, this new regime will compel financial intermediaries to reassess their professional values. Caught between a rock and a hard place: examining the Court’s ability to assist or replace deadlocked trustees Kate Davenport and Jovana Nedeljkov The Court’s power to remove trustees who have misconducted themselves in trust administration or committed a clear breach of trust is well established. In comparison, the Court’s power to assist or replace deadlocked trustees is less well understood. This article will outline the different ways the Court can resolve trustee deadlock and the factors the Court will consider in deciding whether to intervene in trust affairs. It will conclude that the Court has a broad equitable jurisdiction to supervise trusts and properly interpreted, this jurisdiction allows them to intervene in trust affairs by making a decision on behalf of deadlocked trustees or removing trustees in a position of deadlock. Trustees must ensure they keep the welfare of the beneficiaries at the forefront of their minds in trust decision-making and should not shy away from seeking the Court’s assistance when faced with a deadlock that impedes trust administration. Mobilizing the trust for Islamic insurance (takaful) Scott Morrison Takaful is the Islamic counterpart of indemnity-based insurance. It is a cooperative, charitable scheme comprising a fund compensating participants in case of the occurrence of specified adverse events. The features of takaful distinguishing it from insurance give rise to three legal problems: first, the voluntary, non-contractual donation—counterpart of a premium; secondly, the capacity in which the takaful operator invests and manages the fund; and thirdly, the operator’s obligation to return the residue of the fund to participants at scheme expiry. This article explores how the introduction of the English trust provides an amenable solution to these three problems. © The Author (2019). Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)

Fowles,, Jonathan

doi: 10.1093/tandt/ttz018pmid: N/A

Abstract In Lehtimaki v Children’s Investment Fund Foundation (UK)1 (‘CIFF’), the Court of Appeal was right to decide that the Chancellor had been wrong to seek to control a charity fiduciary’s discretion absent actual or threatened breach of fiduciary duty. This decision ought to be welcomed as setting historically sound and principled limits on the tendency to regard charitable trusts as calling for exceptional treatment. Exceptionalism and regulation in the law of charities Trusts lawyers often encounter charity law in the guise of the privileges of charitable trusts, such as the power of the court to prescribe a mode for dealing with a trust for uncertain charitable objects or the exemption of a charitable trust from the rule against inalienability. As Lord Macnaghten said famously in Pemsel’s Case2, a case familiar to every law student: ‘The Court of Chancery has always regarded with peculiar favour those trusts of a public nature which, according to the doctrine of the Court derived from the piety of early times, are considered to be charitable.’ There has for some time been a debate as to whether charitable trusts ought to be treated as sui generis. In 1999, Dr (later Professor) Jean Warburton argued: ‘the present insistence on regarding charitable trusts as part of the general law of trusts not only complicates the reform of the general law of trusts, by the need to consider exceptions and variations for charitable trusts, but also inhibits the development of general charity law by failing to consider charitable trusts in the context of charities as a whole.’3 Among other things, she pointed to the focus of those working in charities on the furtherance of their charitable objects, rather than on particular principles distinctively applicable to the chosen legal structure for the charity. This kind of exceptionalism finds important expression in the description of a charitable trust as in some sense ‘public’, a sense related to but going beyond the now-statutory requirement in the definition of charity that a purpose must in order to be charitable be ‘for the public benefit’.4 In Stanway v Attorney-General,5 Sir Richard Scott V-C said: ‘Charities operate within a framework of public, not private law. The Crown is parens patriae of the charity and the judges of the courts represent the Crown in supervising what the charity is doing and in giving directions, such as those sought from me. The Attorney-General’s function is to make representations to the court as to where lies the public interest as he sees it.’ Dr Liz Chan has recently argued in The Public-Private Nature of Charity Law6 that charity law is a hybrid (public–private) legal tradition. As she points out, one aspect of the public nature of charity law, which can be seen as a counterpart to the special privileges of charity, is the special regulation of charitable trusts and trustees ‘in a manner reminiscent of the special regulation of public authorities and actors by public law.’7 One obvious impetus to intervention by the Crown is the absence of any ‘beneficiary’ strictly so-called given that charitable trusts are purpose trusts.8 It is the Attorney-General’s (and the Charity Commission’s) role in enforcing charitable trusts which allows such trusts to stand outside the beneficiary principle.9 Even in the case of charitable trusts where it is permissible for there to be a small number of beneficiaries, as in trusts for the relief of poverty,10 the ‘beneficiaries’ are defined by their poverty and therefore less likely to be able to enforce a charitable trust. Professor Gareth Jones in his renowned History of the Law of Charity (1531–1827)11 recorded: ‘It has always been a ‘peculiarity of Charitable Trusts’, as the Victorian charity commissioners were to note in 1857, ‘that the persons beneficially interested under them are seldom in a position to originate measures affecting their government, and the disposition of disinterested persons to undertake such measures with a single view to the benefit of their objects cannot always be relied on.’’ A further explanation of charitable status and the way in which it calls for additional regulation, Professor Jonathan Garton suggests in his Public Benefit in Charity Law,12 is the ‘information asymmetry’ between the financiers of a charity and those who carry it out, that is to say: ‘the situation in which the persons willing to fund a particular service have access to significantly less information about that service than the organization providing it, and as such those persons are not easily able to make an informed decision about whether to fund it. Civil society activity tends to information asymmetry in three situations: where it creates a public good; where it involves the provision of complex or intangible public services; and where it is premised on wealth redistribution’.13 Historically, the need for regulation of charitable trusts led by turns to the establishment of Commissioners under the Charitable Uses Act 1601, the bringing of ‘information’ proceedings by the Attorney-General at the relation of a third party, and in light of the inadequacies of court procedures, the establishment of the Charity Commissioners (now the Charity Commission) in the nineteenth century. Today, it is rare for the Attorney-General or the Charity Commission under section 114, Charities Act 2011 (‘the 2011 Act’), to bring court proceedings. The Charity Commission also has concurrent jurisdiction with the court in certain respects (eg to make schemes under section 69, the 2011 Act), and some of the court’s historic functions, eg in the removal of charitable trustees, are often now fulfilled by the Commission. ‘Charity proceedings’ which include a claim for breach of charitable trust but are, broadly speaking, any court proceedings concerned with the internal affairs of a charity, can also only be brought with the Commission’s authorization, or failing that, the court’s leave, under section 115, the 2011 Act. However, while the Charity Commission is perceived as a robust regulator, it is widely acknowledged to be under-resourced relative to the size of the Third Sector. In practice, therefore, there remains substantial scope for parties to seek to involve the court in the affairs of charities, even if they are prevented from doing so by the Commission’s refusal to authorize charity proceedings. In light of this, it was arguably too optimistic (or pessimistic in the eyes of some) for Newey LJ to say recently in Abdelmamoud v Egyptian Association of Great Britain14 that, while a derivative claim by a member of a charitable company under the Companies Act 2006 was theoretically possible, ‘I find it quite difficult, though, to envisage circumstances in which the court would give permission for a derivative claim on behalf of a charitable company. Not only are charities overseen by the Charity Commission, whose functions include ‘taking remedial or protective action in connection with misconduct or mismanagement in the administration of charities’ (see section 15(1) of the Charities Act 2011), but the Attorney General acts as the protector of charity and has a duty ‘to intervene for the purpose of protecting charities and affording advice and assistance to the court’ in the administration of charities: see Wallis v Solicitor-General For New Zealand [1903] AC 173, 181. If the commission or Attorney General is persuaded that there has been misconduct, it can be addressed without a derivative claim being brought. If, on the other hand, neither the commission nor the Attorney General sees the need to intervene, it may be hard to persuade a court that a derivative claim should be sanctioned’. In CIFF, in which Newey LJ also sat as a member of the Court of Appeal (with David Richards LJ and Dame Elizabeth Gloster), the court was again concerned with the affairs of a charitable company. But in CIFF it had to address more directly the court’s role in regulating charities—specifically, the question of the relationship between the court and charity fiduciaries, and the circumstances in which the court can direct such a fiduciary how to exercise his powers. CIFF CIFF was set against the background of the divorce of Sir Christopher Hohn and his ex-wife Jamie Cooper who had together set up the relevant Foundation, an English charitable company limited by guarantee. Following the conclusion of matrimonial proceedings, at Ms Cooper’s request the trustees of CIFF proposed to make a grant of $360 million to a new charitable foundation incorporated by Ms Cooper (BWP). It was agreed between CIFF and Ms Cooper that the grant was conditional on Court or Commission approval and upon certain covenants, which included a covenant by Ms Cooper to resign as a member and trustee of CIFF. CIFF sought the court’s approval of the grant. At first instance, the Chancellor, Sir Geoffrey Vos, held that the trustees had surrendered their discretion to the court.15 Crucially, his Lordship then went on to hold that the transaction fell within section 215, Companies Act 2006 (as a payment for Ms Cooper’s retirement as trustee), so that the members of CIFF would have to approve it under section 217 of that Act.16 CIFF had three members: Sir Christopher Hohn, Ms Cooper, and a Dr Lehtimaki, the last of whom the Chancellor had joined to proceedings on the third day of the hearing. Since, as the Chancellor held, Sir Christopher Hohn and Ms Cooper were contractually obliged to refrain from voting under a Letter of Intent in respect of the grant, Dr Lehtimaki was the only voting member of CIFF. The Court approved the grant, but the question then arose whether in light of that approval there remained the need for the Commission’s approval (under CIFF’s memorandum or Charities Act 2011, section 201) or a members’ resolution (under section 217). Dr Lehtimaki had made it clear that he wished to make the decision himself. The Commission had in the view of the Court deferred to the latter’s decision albeit that the Chancellor held that it should be given the opportunity properly to exercise its statutory discretion.17 In those circumstances, the Chancellor’s view of the position and duties of Dr Lehtimaki as member became decisive. The Chancellor concluded that at least in the circumstances of the CIFF case the members of the charitable company owed fiduciary duties to act in the best interests of CIFF and not to act under a conflict of interest in considering the section 217 resolution.18 He agreed with passages at page 33 from the Commission’s 2004 publication RS7 (March 2004) to the effect that in the circumstances of the case ‘members [of CIFF] have an obligation to use their rights and exercise their vote in the best interests of the charity for which they are a member’.19 He went on to hold that it was not open to any member of CIFF to vote against that resolution once the court and the Commission had approved the transaction: ‘Here, both the Commission and the trustees of CIFF have decided that their discretion to approve the Grant should be exercised by the court. That discretion has now been exercised. The discretion so exercised binds the charity and the charitable company, CIFF. Its management is only divided between trustees and members for specific purposes. Here, the trustees of CIFF bound CIFF in relinquishing their discretion to the court, and the court order will bind CIFF in deciding that the Grant should be made. That means that, whilst the members must pass a resolution under section 217 to approve the Grant, it is not in this case open to any member of CIFF to vote against that resolution, once the court and the Commission have approved the grant. The member does not have a free vote in this case because he is bound by the fiduciary duties I have described and is subject to the court’s inherent jurisdiction over the administration of charities.’20 The sole voting member, Dr Lehtimaki, appealed against the order of the Chancellor that he should vote for the resolution. He argued that CIFF’s members were not fiduciaries and in any event the court was not entitled to make such an order even if they were. The Court of Appeal was therefore concerned with the following questions:21 Was Dr Lehtimaki subject to any (and, if so, what) fiduciary duties? Was the Court’s inherent jurisdiction in relation to charities extensive enough to allow it to order a member to exercise a discretion in a particular way regardless of whether there is evidence of breach of duty on the part of the member (‘the Inherent Jurisdiction Issue’)? In the light of the answers to the previous questions, was the Chancellor entitled, on the facts of the present case, to direct Dr Lehtimaki to vote for a resolution under section 217 of the Companies Act 2006 approving the payment of the Grant? In summary the Court of Appeal decided: Dr Lehtimaki was under a duty corresponding to the statutory duty of a CIO member (section 220, Charities Act 2011) to exercise the powers that he had in that capacity in the way that he decided, in good faith, would be most likely to further the purposes of CIFF. However, the court’s inherent jurisdiction over charities did not extend to directing a member how to vote. The court could intervene in Dr Lehtimaki’s exercise of his voting powers only where he was acting or proposing to act in breach of fiduciary duty. There was no evidence of such a breach, and therefore the Chancellor was not entitled to direct Dr Lehtimaki to vote for the relevant resolution. Whether or not the Court of Appeal’s decision on issue (i) has wide implications for charitable companies generally or only for those in some way analogous to CIFF, the Court’s decision on the Inherent Jurisdiction Issue is likely to affect charities and their fiduciaries generally. Ms Cooper and the Attorney-General argued before the Court of Appeal that the court’s general reluctance to interfere with the decisions of fiduciaries did not or ought not to apply to members of charitable companies (or, as appropriate, the trustees of charitable trusts and the directors of charitable companies).22 Ms Cooper’s Counsel, Lord Pannick QC, argued that the court had a jurisdiction to supervise, control, and direct the regulation of a charity, where the court considered this expedient.23 The Court of Appeal noted the historic recognition by the courts of the ‘special treatment’24 that charities have received in English law, and the important role of the courts and the Attorney-General in relation to charities, quoting the passage from Sir Richard Scott V-C’s judgment in Stanway above.25 The Court of Appeal started its analysis with the conventional approach to the decisions of private trustees,26 as summarized in the well-known case of In re Beloved Wilkes’ Charity27 about the power of certain trustees to select a student to be trained as a Minister of the Church of England under a charitable will trust: ‘in such cases as I have mentioned it is to the discretion of the trustees that the execution of the trust is confided, that discretion being exercised with an entire absence of indirect motive, with honesty of intention, and with a fair consideration of the subject. The duty of supervision on the part of this court will thus be confined to the question of the honesty, integrity, and fairness with which the deliberation has been conducted, and will not be extended to the accuracy of the conclusion arrived at, except in particular cases’. The application of this principle in a charities context was further supported28 by reference to the judgment of the Upper Tribunal in R (Independent Schools Council) v Charity Commission for England and Wales,29 where the Tribunal made clear it could not and would not tell the charity trustees of independent school charities how to exercise their powers in fulfilment of their charitable objects. No authority binding on the Court of Appeal was cited for the application of the principle of non-intervention in the context of charitable fiduciaries, and obviously not in the context of member fiduciaries given that CIFF recognizes a fiduciary duty on members for the first time.30 On the other hand, the Court of Appeal rightly found the authorities cited to them in support of a more interventionist approach to be concerned with the court’s distinctive jurisdiction to make schemes in relation to charities31 or simply not decisive of the point.32 There had been no application for a scheme in this case. But it is an open question what would have been the position if the grant had been sought to be effected by way of a scheme eg by the imposition of a duty on the charity trustees to make the payment. It may seem artificial to some that what the court might be able to achieve by scheme it cannot achieve more directly by a more general jurisdiction to give directions where expediency demands it. The fact that CIFF is a company (and not a trust) would probably not have been obstacle to the making of a scheme.33 But one answer, at least in CIFF, would have been for the Court of Appeal to have held that the possibility of such an administrative scheme was excluded by the regime for member approval in sections 215 and 217, Companies Act 2006. This argument would be by analogy with the principle that, at least where a charity is established by an Act of Parliament, the court will not make a scheme in conflict with the Act.34 The Court of Appeal also rightly rejected the argument that the principle in Saunders v Vautier,35 viz. that a trust can be brought to an end by its absolutely entitled beneficiaries of full age and capacity acting together, was applicable by analogy to charities, with the Attorney-General as beneficiary. Neither the court nor the Commission (except by statutory power to direct a winding up: see section 84B, 2011 Act36) has the power to bring about the termination of a charitable trust;37 it is difficult to see why the Attorney-General could. The Court of Appeal concluded their reasoning that the principle of non-intervention applied with reference to a number of compelling factors by way of reinforcement of their decision: a charity’s duly appointed organs will usually be more familiar with the charity’s affairs than a judge; there was a risk of discouraging donors, charity trustees, and members if the court could interfere with decisions where expedient; in this case, section 217, Companies Act 2006, and section 201, 2011 Act, had together entrusted the decision to the membership of CIFF subject to the written consent of the Charity Commission.38 Conclusions It is tempting to feel that the Chancellor’s judgment as to what was in the best interests of CIFF ought to have been binding on Dr Lehtimaki given that he was party to proceedings and was joined partly for that purpose.39 However, the joinder of Dr Lehtimaki did not change the nature of the proceedings as the Chancellor characterized them—it was only the trustees who had surrendered their discretion, and not Dr Lehtimaki. Once the Chancellor’s decision is regarded as one about the decision-making of the charity trustees, there is nothing illogical about Dr Lehtimaki being permitted to depart from the Chancellor’s approval of the grant after honest and proper consideration even if he is bound by the decision. From a broader perspective, the Court of Appeal’s preparedness to apply the principle of non-intervention to a charity is not disruptive of charity law generally because the principle is not distinctively a trusts law principle. That is to say: since the principle is probably not peculiar to the trust as a particular kind of legal structure for charity, it is unlikely to cause troublesome discrepancies within charity law in so far as charity law straddles structures of different kinds. CIFF was of course concerned with a company and not a trust, and while this was not expressly recognized in the Court’s judgment, the principle of non-intervention is consonant with the court’s approach to the management decisions of directors of private companies.40 The Court of Appeal’s decision also correctly reflects the historic respect accorded to trustee autonomy in the regulation of charitable trusts, which has gone hand-in-hand with the special favour shown to them by the Crown. The Commissioners’ jurisdiction under the Statute of Charitable Uses 1601, which established Commissioners who were subject to the supervision of the Chancellor to investigate breaches of charitable trust, could not be used to interfere with or vary the discretion of trustees, if the trustees had acted responsibly, deliberately, and in accordance with the donor’s will.41 Later, when use of the ‘information’ as a form or proceedings was conventional, the courts were reluctant to intervene in the administration of a charity, which was generally left to the trustees. In Attorney-General v Haberdashers’ Co.,42 upon an information to establish a charitable will trust, Lord Thurlow LC, having decided the principle upon which a surplus was to be divided under a scheme, went on: ‘As to the execution of the trust, it is not to be kept under the direction of the Court, to be executed by the Court from time to time, but is to be executed under a general direction to the trustees; which is the only way of administering a charity … If the trustees misbehave, there must be another information upon the new ground. I cannot keep this information here for ever. I know, these applications to the Court are very expensive; and for that reason I want to get rid of it.’ Likewise in the same matter which had mistakenly continued for decades after the death of the original relators and the filing of an information without the Attorney-General’s involvement, Lord Romilly MR was of the view that, once the court had made a scheme, it should not be drawn into the administration of the charitable trust.43 A similar reluctance to intervene, absent mismanagement, even by making a scheme was shown by Sir William Grant MR in Waldo v Caley,44 although this was not a prerequisite to a scheme.45 It is striking that in AG v Governors of Harrow School46 Lord Hardwicke LC came close to a different approach by not dismissing an information, even though he had rejected its plea to intervene in the governors’ discretion, in order to ‘keep a hand over’ the conduct of charity trustees. Nevertheless, there is no indication that he was prepared to intervene absent impropriety even in the future: ‘At present I do not see how I can interpose; and if I should, it would be in contradiction to the intent of the donor; which was to leave it in the sound discretion of these judges [i.e. the governors of Harrow School]; and where they act fairly, and not corruptly or partially, a court of justice would do too much to control their acts.’47 Today, even the Charity Commission under the 2011 Act is typically limited in the self-initiated exercise of its protective and remedial powers by the need for it first to be satisfied that there has been misconduct or mismanagement and/or that there is a need to protect, or secure the proper application of, charity property. It is not authorized to exercise functions corresponding to those of a charity trustee or otherwise directly to be involved in the administration of a charity.48 It does have powers to direct specific action to be taken, including the winding up of a charity, or not to be taken.49 But in all such cases, these powers arise only after a statutory inquiry has been commenced and the Commission is satisfied in one of the respects already mentioned or, where action is to be prevented, that it would constitute misconduct or mismanagement. Likewise, the Commission’s power to direct the application of charity property is not based on its view of what is expedient but depends on a person who is in possession or control of charity property being unwilling or unable to apply it properly.50 Furthermore, I would suggest that the particular ‘public’ nature of charitable trusts, far from calling for a more interventionist approach from the courts, provides additional justification for a light touch. Given that faith in the charity sector depends on charity funds being spent to further charitable objects for the public benefit, it is important that such funds are not frittered away in internal disputes or other litigation.51 A wide supervisory jurisdiction would be an invitation to litigation, and given the breadth of a hypothetical jurisdiction based on expediency, the Charity Commission may find it difficult to keep the number of such cases within reasonable limits by refusing authorization under section 115, the 2011 Act. At the very least, the under-resourced Commission would be likely to be deluged with applications for such authorization. There is also the need for charity fiduciaries not to be discouraged by a heavy-handed approach on the part of the Court, as the Court of Appeal acknowledged in CIFF. The need for the courts to avoid deterring persons from acting as the trustees of charities was acknowledged in a different context by the House of Lords in the Scottish case of Andrews v McGuffog.52 A ‘hands-off’ approach on the part of the courts does not of course mean that charity trustees have nowhere to turn. Where charity trustees can properly surrender their discretion or in some other way need properly to seek the court’s guidance, there is nothing to prevent them from doing so save that they will require the Commission’s authorization to bring charity proceedings. In many cases, the Commission may be able to exercise its own powers to enable the necessary decision-making, and sanction for or advice on a particular transaction may also in appropriate cases be sought from the Charity Commission under sections 105 or 110, the 2011 Act. A risk was avoided in CIFF that judicial expressions of special concern for charitable trusts, together with the court’s scheme-making powers, would be translated by logic into an extraordinary, general jurisdiction. There is room for argument as to whether it is anomalous that the court should be able to make a scheme where expediency demands it but not be able to control a charity fiduciary’s decision-making in another more direct way absent breach of duty. But as Viscount Simonds said in a famous charities case:53 ‘It is a trite saying that the law is life, not logic. But it is, I think, conspicuously true of the law of charity that it has been built up not logically but empirically.’ Jonathan Fowles is a barrister at Serle Court. He is co-editor of Tudor on Charities, 10th edition (Sweet & Maxwell, 2015) and the First Supplement to the 10th edition (Sweet & Maxwell, 2018). Most of this article is new material, but some passages in this article appear in the First Supplement. E-mail: [email protected]. Footnotes 1. [2018] EWCA Civ 1605; [2018] 3 WLR 1470. 2. [1891] AC 531 at 580. 3. ‘Charitable Trusts – unique?’ Conv 1999, January–February, 20–31 at 30. For a different perspective, see David Dennis, ‘The Judicial Control of the Exercise of Discretionary Powers by Charitable Trustees’ (2006) 9 (3) Charity Law & Practice Review 1–57, where he argued that the true basis of private law trust principles itself justified differences in application but not differences in the applicable principles themselves. 4. s 2(1)(b), Charities Act 2011. 5. Unreported, 5 April 2000, p 3 of transcript. 6. Bloomsbury, 2016. 7. ibid p 32. 8. See eg Attorney-General v Cocke [1988] Ch 414. 9. Leahy v A-G of New South Wales [1959] AC 457 at 478–79 per Viscount Simonds. 10. Attorney-General v Charity Commission etc (Poverty Reference) [2012] WTLR 977. 11. CUP, 1969 (2008 reprint), 20–21. 12. OUP, 2013. 13. ibid at 3.10; pp 61–62. 14. [2018] EWCA Civ 879 at [36] per Newey LJ, with whom McCombe and Longmore LJJ agreed. 15. [2018] Ch 371 at 399F. 16. ibid at 407G. 17. ibid at 419F-G. 18. ibid at 416D. 19. ibid at 418B-D. 20. ibid at 421A-B. 21. [2018] 3 WLR 1470 at 1482F-G. 22. ibid at 1489D. 23. ibid at 1482A. 24. Gaudiya Mission v Brahmachary [1998] Ch 341 at 350D per Mummery LJ. 25. CIFF at 1489C-E. 26. ibid at 1488G-1489B. 27. (1851) 3 Mac & G 440 at 448 per Lord Truro LC. 28. ibid at 1493G-1494A. 29. [2012] Ch 214 at 284C-F. 30. As to Re Beloved Wilkes, It is doubtful that a decision of the Lord Chancellor sitting alone binds the Court of Appeal: Wheeldon v Burrows (1879) 12 Ch D 31 at 54–55 per Thesiger LJ; Ashworth v Munn (1880) 15 Ch D 363 at 377 per James LJ; contrast Gard v Commissioners of Sewers of City of London (1885) 28 Ch D 445 (Lord Chancellor’s decision on appeal binding). 31. Re JW Laing Trust [1984] Ch 143; Re Royal Society’s Charitable Trusts [1956] Ch 87; Attorney-General v Dedham School (1827) 23 Beav 350 Attorney-General v Gleg (1738) 1 Atk. 356. 32. Construction Industry Training Board v Attorney-General [1973] Ch 173. 33. Liverpool District Hospital for Diseases of the Heart v Attorney-General [1981] Ch 193, where Slade J held that a cy-près scheme could be made in relation to the assets of a charitable company incorporated under the Companies Acts. 34. Construction Industry Training Board v Attorney-General [1973] Ch 173 at 187 per Buckley LJ. The Chancellor in CIFF rejected the argument that this principle prevented the court from ordering Dr Lehtimaki how to vote in the context of a company incorporated under the Companies Acts: [2018] Ch 371 at 418G-H. 35. (1841) Beav 115. 36. See s 84B, 2011 Act. 37. Re Faraker [1912] 2 Ch 488 at 495 per Farwell LJ. 38. CIFF at 1494. 39. [2018] Ch 371 at 397B-C. 40. See eg Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 832D-E per Lord Wilberforce. 41. Gareth Jones, History of the Law of Charity (1531-1827) (CUP, 1969, 2008 reprint) 49–50. 42. (1791) 1 Ves J 295. 43. Attorney-General v Haberdashers Co (1852) 15 B 397 at 406. 44. (1809) 16 Ves 206 at 211–12 45. See eg Attorney-General v Dedham School (1857) 23 Beav 350. 46. (1754) 2 Ves Sen 551. 47. ibid at 552. 48. s 20(2), 2011 Act. 49. ss 84, 84A, and 84B, 2011 Act. 50. s 85(1)(a), 2011 Act. 51. See eg The British Diabetic Association v The Diabetic Society [1996] FSR 1 at 6; Muman v Nagasena [2000] 1 WLR 299 at 305C per Mummery LJ. 52. (1886) 11 App Cas 313 at 324 per Lord Watson, quoting Lord Eldon in Attorney General v Corporation of Exeter (1826) 2 Russ 45 at 54 on the court’s approach to such trustees who have acted in honest error. 53. Gilmour v Coats [1949] AC 426 at 48–49. © The Author(s) (2019). Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)

Pawlowski,, Mark

doi: 10.1093/tandt/ttz021pmid: N/A

Abstract The article seeks to advocate a change in English law by the introduction of a statute validating private purpose trusts along the lines of the legislation already in force in several offshore jurisdictions. It considers the various elements of any such new statute with particular reference to the definition of a private purpose trust, the mechanism of an enforcer, the subject of perpetuities, the definition of purpose, the type of trust instrument, the nature of determining events, the definition of default beneficiaries and trustees, and the problem of disclosure. As we know, English law does not permit private (non-charitable) purpose trusts except in very limited circumstances. Thus, trusts for the care of particular animals, the erection and maintenance of monuments, graves and tombs, the saying of masses, or the performance of other religious ceremonies have been upheld provided the relevant purpose is sufficiently certain and not capricious (so as to be contrary to public policy) and confined to the perpetuity period.1 Such trusts, however, although valid, remain unenforceable in the sense that the trustee cannot be compelled to perform the terms of the trust if, for whatever reason, he is unwilling to do so. Apart from these anomalous exceptions, there has been some relaxation of the so-called ‘human beneficiary’ rule. Thus, in Re Thompson,2 where a testator bequeathed a legacy of £1000 to a friend to be applied towards the promotion of foxhunting, Clauson J upheld the bequest, despite the absence of a human beneficiary, because of the willingness of the residuary beneficiary to apply to the court in the event that the trustee failed to apply the legacy for the stated purpose. Similar reasoning can be found in other cases.3 More significantly, however, in Re Denley’s Trust Deed,4 Goff J held that a gift of land for use as a sports ground was valid as the persons entitled to use the ground had a sufficient factual interest in its enjoyment. The employees had clearly no proprietary interest in the land, but this was held not to be fatal to the validity of the trust. In other cases, there may be factual beneficiaries in the form of members of an unincorporated association5 or owners of an estate. Thus, in Re Bowes,6 a will contained a gift of £5000 upon trust to plant trees for shelter on an estate. The gift was held valid on the basis that it was really to benefit the owners of the land. This rationale may also explain the so-called Quistclose trust cases. In Barclays Bank v Quistclose Investments Ltd,7 the directors of a company declared a dividend payment but then found that they had insufficient funds to pay it out. They, therefore, borrowed funds from a financier on the condition that the funds would be used to pay the dividend. The borrowed funds were paid into a separate bank account opened specifically for the purpose. Before the dividend could be paid, the company went into liquidation. The House of Lords held that the loan gave rise to a trust to pay the dividend and the lender had an equitable right to see if the funds were used for that stated purpose. However, because the purpose could not be carried out, the funds were held to revert back to the lender on a resulting trust. Although enforceability was, clearly, not the rationale for the ruling, it seems that the House of Lords considered the existence of a factual beneficiary (ie, the creditor who supplied funds for the specific purpose) as sufficient to give validity to the trust. A new purpose trust statute? It is apparent from even a cursory review of the English law that there is little in the way of a sound basis for understanding why some private purpose trusts have been upheld and others have not. What is needed, it is submitted, is a more robust approach to the reform of such trusts involving a general recognition that they are valid save in exceptional cases where the purpose is clearly unlawful or contrary to public policy. The answer to reform, therefore, in the writer’s view lies in the approach already recognized in several offshore jurisdictions; notably, Bermuda, the British Virgin Islands (BVI), the Cayman Islands, the Isle of Man, and Jersey, of validating purpose trusts through legislation. Each of these jurisdictions has introduced purpose trust legislation as a deliberate policy decision to provide a change in the law to meet current commercial needs and specific client requirements. They are all well-respected offshore service providers and, it is submitted, serve as useful models for the introduction of new legislation in this country. Definition of a private purpose trust Perhaps, the most fundamental question is how to define a non-charitable purpose trust. Several jurisdictions have opted for a negative definition. Thus, Article 10(2)(a)(iv) of the Trusts (Jersey) Law 1984 provided (in its original form) that: A trust shall be invalid to the extent that it is created for a purpose in relation to which there is not a beneficiary not being a charitable trust. This provision was amended in 1996 to allow for the validity of non-charitable purpose trusts by the insertion of a new clause: A trust shall not be invalid to any extent by reason of Article 10(2)(a)(iv) if the terms of the trust provide for the appointment of an enforcer in relation to its non-charitable purposes …. This negative definition has been adopted in many of the other jurisdictions, including Bermuda, where purpose trust legislation is treated as an ‘add-on’ to existing trust law. This approach, however, has its difficulties because the negative definition presupposes that the particular trust is non-charitable in nature in order to acquire validity under the new rules. There is also the danger that, if human beneficiaries are included in the trust (or if they benefit indirectly from the purpose), this brings the trust back into the scope of the non-purpose trust rules. The Cayman Islands, on the other hand, adopted a more radical approach. The Special Trusts (Alternative Regime) Law of 1997 (STAR)8 introduced an entirely new trust regime. This applies whenever it is expressly invoked by the trust deed or, in certain cases, where its application can be deemed to apply. It can, therefore, apply to trusts for human beneficiaries, charitable or non-charitable purpose trusts, and trusts for both purposes and beneficiaries. The STAR approach is, therefore, preferable, giving the settlor/testator the opportunity to choose a specific trust to be subject to the new legislation. The chosen trust vehicle would have to be stated within the trust instrument. This would also force the settlor/testator to consider carefully the type of trust being created. Enforcer There are also differences between the methods of enforcement of a purpose trust in the five jurisdictions. In most regimes, the enforcer must be named in the trust instrument or, at least, the instrument must contain the mechanism for appointing an enforcer. Bermuda, however, adopts a different approach. Here, anyone with a sufficient interest may enforce the purposes and, in default, the Attorney General has the power to enforce.9 There is, therefore, no need to appoint an enforcer in the instrument itself. The Bermudian concept of allowing anyone with an interest to act as enforcer is attractive, but this could lead to no one acting as enforcer. Ideally, the enforcer should be appointed in the initial trust instrument. If not, there must be a mechanism in the trust instrument for the enforcer to be appointed, say by the settlor during his lifetime or by the trustees under his will. The enforcer should have the power to appoint a replacement, again with the trustees being required to appoint a new enforcer if there ceases to be an enforcer in place at any time or for any reason. As with most jurisdictions, there should be penalties to ensure that the trustees act to appoint an enforcer. The role of the enforcer should be clearly defined as a fiduciary (as opposed to personal) obligation. The court would, therefore, have the power to remove an enforcer in the event of a breach of fiduciary duty, or if the enforcer becomes incapable of fulfilling the role, in the same way as the courts can remove or appoint trustees under the Trustee Act 1925. An application to the courts could, therefore, be made if the enforcer loses capacity, becomes bankrupt, or is sentenced to prison, but it may be more practical for the enforcer to be deemed to retire automatically upon any such event occurring. The trustees would then be required to appoint a new enforcer if there is no replacement enforcer. Ideally, an individual rather than company should, it is submitted, be appointed as the enforcer. The enforcer must not be in a position of conflict and must, therefore, be independent of the trustees and beneficiaries. In most jurisdictions, the enforcer is given limited statutory rights to access documents and information concerning the trust. Thus, under Jersey law, eg the enforcer has the same rights as a beneficiary to see documents that relate to (or form part of) the trust accounts. It is possible, however, to include express provision in the trust instrument, whereby an enforcer has more extensive rights to trust documentation if this is considered appropriate or desirable in particular circumstances. In contrast, under the Isle of Man legislation,10 the enforcer has an absolute right of access to any information or documentation which relate to the trust, including the assets of the trust and the records in respect of administration. Perpetuities The Perpetuities and Accumulations Act of 2009, which introduced a single perpetuity period of 125 years, does not affect the rule of law which limits the duration of non-charitable purpose trusts under English law: see, Section 18. The common law rule on the duration of such trusts still applies, namely, that such a trust cannot continue for longer than the life of an identified person in being plus 21 years. If no person is identified, then the trust should last for only 21 years.11 Certain jurisdictions (eg, Isle of Man) have chosen to subject purpose trusts to their usual trust perpetuity period. Others (eg, Bermuda, Jersey, BVI, and Cayman) have opted to exempt purpose trusts from the perpetuity rule altogether. This does not necessarily mean, however, that purpose trusts can continue indefinitely. In some jurisdictions, notably the BVI, the legislation gives the option of specifying a terminating event or date providing for the disposition of the trust assets. The approach taken in the Isle of Man is, perhaps, more restrictive. Here, a perpetuity period of 80 years specifically applies to purpose trusts, but the trust instrument must also specify a ‘termination event’ and what happens to the trust assets on the happening of this event. There does not appear to be any reason for a non-charitable purpose trust to be exempted from the rule against perpetuities. The new legislation could, therefore, provide for a 125-year perpetuity period to apply to private purpose trusts, but with no restriction on the accumulation of income during the trust period. Definition of purpose One fertile area of debate has been whether a private purpose trust can have purely ‘internal’ purposes, eg to hold the shares of a particular company. Some commentators have argued that this does not satisfy the requirements of any purpose trust legislation. If the question is posed: ‘for what purpose is the trust property held?’ It is no answer simply to say: ‘to hold the trust property’. The trust must indicate why, or with what objective, the trust property is being held. This view, however, has not prevented a purpose trust being created in some jurisdictions for the sole purpose of holding shares. For example, Bermuda purpose trusts are apparently frequently used to hold shares in private trust companies. The BVI has specifically recognized this problem, and its solution was to introduce a new concept of ‘VISTA’ trust. The Virgin Islands Special Trusts Act of 200312 came into force on 1 March 2004, which allows trusts to be set up solely to hold shares in a BVI company (either an international business company or a local company). It also restricts the role of the trustees in the management of the company so that their role is to hold the shares rather than be involved in the business of the company. It is self-evident that the purpose should not be contrary to public policy, should be certain, and not to conflict with any existing law. An obligation could be imposed on the enforcer to satisfy himself that the purpose is legitimate—if, eg the purpose becomes impossible to fulfil, this would be a determination event triggering the default trust provisions. Type of trust instrument Significantly, certain jurisdictions permit the creation of a purpose trust by will. The Isle of Man specifically permits purpose trusts to be created by an inter vivos trust deed or by will provided the latter is admitted to probate.13 The Cayman Islands’ STAR trusts can also be set up by trust deed or will. Moreover, Article 7 of the Jersey Trusts Law expressly provides that a trust (which would include a private purpose trust) can be created by will or codicil. On the other hand, the BVI legislation specifies that the enforcer must be a party to the trust deed creating the purpose trust. In this connection, it is hard to see how an enforcer could be party to someone else’s will or how the testator could act as enforcer after his death. It would, presumably, be necessary to create the purpose trust during the settlor’s lifetime, but then for his will to contain a gift of assets to that pre-existing purpose trust. Any new legislation in this country, it is submitted, should permit the purpose trust to be created by an inter vivos trust deed or by will. To avoid any difficulties in the latter case, there should be no requirement that the enforcer must be a party to the trust instrument creating the purpose trust. Determination events The idea of a non-charitable purpose trust being required to have a specified determination event appears sensible. A perpetuity period of 125 years would operate only as a long stop. The earlier determination should be when the purpose has been fulfilled, or if the enforcer determines that the purpose is no longer possible. This again requires that the enforcer be independent of the trustees and default beneficiaries to avoid conflicts of interest. Default beneficiaries The trust instrument would have to specify how the trust assets are to be distributed on determination or at the end of the trust period. Having a charitable purpose (or human beneficiaries) as default beneficiaries does not conflict with current English trust law and should, therefore, be permitted in the new purpose trust legislation. But what about a corporate settlor benefiting when the purpose trust terminates? This might be vital to ensure that assets are returned once the purpose has been completed or has failed, although in some cases it may be appropriate to name a charity as default beneficiary. There appears to be no policy reason preventing companies receiving back assets. Certainly, if a settlor creates a trust which fails and does not name a default beneficiary, a resulting trust arises in the settlor’s favour. There is no reason why this should apply solely to human settlors and, indeed, it appears to have been already acknowledged that a company can be a settlor and a beneficiary of a trust. At the end of the trust period or on determination, it should not be possible to pass the assets into a new trust, unless it is a charitable trust that is exempt from the rule against perpetuities. Disclosure Should the default beneficiaries be informed of their interest under the trust so as to ensure they can enforce their rights? Some jurisdictions have taken the view that, as long as an enforcer has been appointed, there should be no reason to force disclosure onto the default beneficiaries. However, the default beneficiaries would have the right, under English law, to see trust documentation and accounts even before they were entitled to benefit. It would, therefore, seem sensible to have an obligation to inform all beneficiaries of the existence of the trust and their potential interests. The law in this area is not, however, clear and it is hard to see why trustees of a purpose trust should have an obligation to inform beneficiaries of their rights, if trustees of non-purpose trusts do not have the same obligation. It has been said that one of the attractions of STAR trusts in the Cayman Islands is the ability of the settlor to prevent disclosure of information to beneficiaries. This could be particularly attractive to individual settlors who wish to provide for young children without those beneficiaries being aware of the existence of the trust. However, many practitioners have now questioned whether STAR trusts can be used in this way, and there is little to support the view that English purpose trusts should be used to prevent disclosure of information to beneficiaries. Trustees Many jurisdictions state that only designated trustees can be appointed as trustees for a purpose trust. The main difficulty with this is that in England, there is no registration or licensing of trustees. This contrasts sharply with offshore jurisdictions where licensing of trustees is now a commonplace. Instead, the new legislation could follow the Trustee Act 1925 approach—the purpose trust must have as trustee a trust corporation or two trustees (this could be one company and one individual). An unfit individual (eg a bankrupt or person of unsound mind) would not be able to act as trustee. Conclusion The writer is conscious that it may be some time before purpose trust legislation is enacted in this country. It is the writer’s hope, however, that the topic will become the subject of a formal consultation by the Law Commission in the not too distant future. Mark Pawlowski is a Barrister, Professor of Property Law in the School of Law, University of Greenwich, London, UK. Email: [email protected]; http://www.gre.ac.uk/law. Footnotes 1. See, Re Endacott [1960] Ch 232. 2. [1934] Ch 342. 3. See Pettingall v Pettingall [1842] 11 LJ Ch 176; Re Astor’s Settlement Trusts [1952] Ch 534. 4. [1969] 1 Ch 373. 5. See, Re Lipinski’s Will Trusts [1976] Ch 235. 6. [1896] 1 Ch 507. 7. [1970] AC 567. 8. Currently incorporated into Pt VIII of the Trusts Law (2011 Rev). 9. See the Trusts (Special Provisions) Amendment Act 1998. 10. See the Isle of Man Purpose Trusts Act 1996. 11. Re Hooper [1932] 1 Ch 38. 12. See also now, the BVI Trustee (Amendment) Act 2013. 13. See generally n 10. © The Author(s) (2019). Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)

Smith,, Lionel

doi: 10.1093/tandt/ttz020pmid: N/A

Abstract Trust drafting practices have changed dramatically in recent decades. A range of considerations has led to an increase in the dispositive discretions held by trustees. In some cases, the trustees’ dispositive discretions effectively govern the whole trust structure, leading to what the author calls a ‘massively discretionary trust’. These trusts create a series of legal risks. These include the possibility that the trust property is held on resulting trust from the moment of the trust’s constitution and the possibility that the beneficiaries can collapse the trust and take the trust property. Some drafting techniques may be based on a misunderstanding of the law; some may invite litigation; and the governing legal principles, as understood by some drafters, may be subject to revision and refinement by the courts. This article will examine some of these possibilities using concrete examples. Introduction Trust drafting practices have changed dramatically in recent decades. A range of considerations has led to an increase in the dispositive discretions held by trustees. In some cases, the trustees’ dispositive discretions effectively govern the whole trust structure, leading to what could fairly be called a ‘massively discretionary trust’. These trusts first became popular in offshore jurisdictions, but have now moved onshore.1 The goal of this article is to identify a range of legal risks that may arise from this style of trust drafting. I use this term, ‘legal risk’, in a broad way to cover risks arising from uncertainties about the law, as well as risks of litigation. Onshore courts may not be as accepting of massively discretionary trusts as some drafters may wish. The relevant legal risks include the possibility that the trust property is held on resulting trust from the moment of the trust’s constitution, and the possibility that the beneficiaries can collapse the trust and take the trust property. These and other risks can arise in several ways. Some drafting techniques may be based on a misunderstanding of the law; some techniques may invite litigation; and the governing legal principles, as understood by some drafters, may be subject to revision and restatement by onshore courts. This article will examine some of these possibilities using concrete examples. Terminology In 2011, the Judicial Committee of the Privy Council gave its advice in Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd.2 Lord Collins, giving the advice of the Board, described the trusts in issue in the following terms: Mr Demirel [the settlor] had established two discretionary trusts in the Cayman Islands, with assets of some US$24m. For practical purposes the beneficiaries are Mr Demirel and his wife. … On 28 June 1999 Mr Demirel executed two deeds of trust, establishing two trusts, the Mana Trust and the Dolphin Trust (‘the Trusts’). … The Trusts are Cayman Islands discretionary trusts, and it is common ground that the Trusts are valid and duly constituted as a matter of Cayman Islands law. The discretionary objects of both Trusts are Mr Demirel, Ayse Nur Esenler, who is now the wife of Mr Demirel, and Mr Demirel’s children and remoter issue now living or born afterwards. At present, Mr Demirel has no living children or remoter issue. The residuary beneficiary is charity [sic].3 There is no rule book for the terminology of trusts, and indeed some of it is surprisingly unstable. Some of the most basic words and phrases—‘trust’, ‘beneficiary’, ‘discretionary trust’—are ambiguous. This ambiguity can lead to serious misunderstandings about fundamental principles. ‘Trust’ Even the word ‘trust’ is used in two different senses. The wider sense of ‘trust’ is that of ‘a legal structure in which property is held in trust’. This is the sense that Lord Collins used when he said that the two ‘trusts’ were called the Mana Trust and the Dolphin Trust. Such a structure can have a whole range of terms, dealing with interests in income and capital; it may give the trustee, or others, or both, dispositive discretions in relation to the trust property; and it likely has any number of provisions on administrative powers, including investment powers. Sometimes, the trust is given a name. The narrower sense is that of ‘an obligation with respect to the benefit of property’. This sense is found in the first sentence of Underhill and Hayton.4 This is the sense that is used when someone examines a particular provision within a trust structure, and asks, ‘does it create a trust or a power?’5 Even if the answer is ‘a power’, this does not mean that there is no trust structure; there is probably still a trust in the wide sense, since there are other provisions and since property is held in trust by trustees.6 The conclusion means only that the particular provision does not create a trust in the narrower sense, but rather gives the trustees (or someone) a discretionary power; this implies no conclusion about whether there is a trust in the wider sense.7 The overlap between the two senses is that every trust structure—every trust in the wider sense—must include at least one trust in the narrow sense—an obligation with respect to the benefit of the property held in trust. It is because of that obligation that we can say that the property is held in trust; and then we may use the wider sense to refer to the whole structure, discretions and all. Conversely, if there is no trust in the narrow sense, there can be no trust in the wider sense either. This is because if there were no trust in the narrow sense, the ‘trustees’ would not owe any obligation relating to the benefit of the property; but then, they would not be trustees. And this is why, outside of trusts for charitable purposes, there is no trust unless there is a beneficiary: to say that the trustee owes an obligation with respect to the benefit of the property is to say that someone is owed that obligation.8 The person who is owed the obligation is a beneficiary. The principle that there must be a beneficiary in order for there to be a trust is usually called the beneficiary principle. A beneficiary is always needed for there to be a trust in the narrow sense; and a trust in the narrow sense is always needed for there to be a trust in the wider sense.9 ‘Beneficiary’ Even ‘beneficiary’ is ambiguous. When there is a trust in the narrow sense, not being a charitable trust, the trustee is obliged to hold the trust property for the benefit of one or more persons. They are called beneficiaries: the persons who are entitled to the trust property, even though their entitlements may be vested or contingent, defeasible or indefeasible. That is the strict or narrow sense of the word ‘beneficiary’. But the word has wider senses. We may talk of the beneficiary under a policy of life insurance, or under a will; these persons are not trust beneficiaries. In the trust context, various people may benefit from a charitable trust, and may in a wide sense be called beneficiaries; but they are not beneficiaries of the trust in the strict sense. More importantly, the same is true for objects of a discretionary power, even if it is a power held by trustees, and even if the property in question is held in trust. Assume that the trustees have a discretionary power that allows them, but does not require them, to transfer some or all of the trust property to one or more of the settlor’s children. It may be that the children get all of the property, bringing the trust to an end. They benefit. But in their capacity as objects of a power, they are not trust beneficiaries, and they cannot satisfy the beneficiary principle. The reason is that the trustee does not owe them any obligation relating to the benefit of the property. They are not beneficiaries in the strict sense.10 The beneficiary principle requires the presence of one or more beneficiaries in the strict sense.11 The ambiguity of the term ‘beneficiary’ is illustrated by the passage set out above from the TMSF case.12 Mr Demirel and his wife are said to be beneficiaries ‘[f]or practical purposes’; then they are described as ‘discretionary objects’, and ‘charity’ is said to be the ‘residuary beneficiary’. The reason this is important is that objects of discretionary powers are not beneficiaries in the strict sense and cannot satisfy the beneficiary principle. This cannot be changed by calling them ‘beneficiaries’ in the trust instrument.13 The beneficiaries, in the strict or correct sense and as a matter of trust law, are the people who will get the trust property if the discretions held by trustees or others are not exercised. This is another way of saying that they have a right, albeit defeasible by the exercise of the discretions, to the trust property. Objects of powers do not have any right to any property. Perhaps less obviously, they do not have a right to enforce the trust, certainly when ‘trust’ is used in the narrow sense. This is just saying the same thing in a different way, because the trust in the narrow sense is the obligation relating to the benefit of the trust property, and by definition, that obligation is owed to the beneficiaries in the strict sense and not to the objects of any discretionary powers. Or in other words, since objects of powers do not have any right to any trust property, they cannot enforce obligations owed by the trustees in relation to the benefit of the trust property. But it appears that the rights of objects of powers are even more limited than this: they do not have standing to sue for breach of trust. In Re Manisty’s Settlement,14 Templeman J said: The court cannot insist on any particular consideration being given by the trustees to the exercise of the power. … If a person within the ambit of the power is aware of its existence he can require the trustees to consider exercising the power and in particular to consider a request on his part for the power to be exercised in his favour. The trustees must consider this request, and if they decline to do so or can be proved to have omitted to do so, then the aggrieved person may apply to the court which may remove the trustees and appoint others in their place. This, as I understand it, is the only right and only remedy of any object of the power… It may also be that in an appropriate case, albeit an unusual one, the court might exercise the discretion itself.15 But the point is that the object’s rights are limited to ensuring the proper exercise of the power. This might seem surprising. If a trustee had misappropriated property, or had made negligent investments, or was about to enter into a transaction in a conflict of interest, or had secured an unauthorized profit, should not the object of a power have standing to complain? There seems to be no onshore authority that affirms such a proposition, and a moment’s reflection shows why this is the case. The object, by definition, has no right to any of the trust property. All of the actions that a beneficiary may take that are related to the proper administration of the trust are different ways of ensuring that the trust property is preserved, protected, and properly applied; but only a beneficiary has any right to any of that property. In other words, trustees’ duties relating to the proper administration of a trust are essential to the performance of the trust in the narrow sense, and those duties are owed to the beneficiaries. If the object of a discretionary power were allowed to enforce the proper administration of the trust, it seems that she would effectively be enforcing the rights of someone else: namely, the beneficiary. But by what authority? Against that, one might say that since the trust property is the property which the object has a possibility of acquiring, therefore the object of a power has a right that the trust be properly administered. But this does not follow; indeed it begs the question. Just because one has a hope of acquiring something, it does not follow that one has a right to its preservation. If Albert’s current will leaves his house to Brenda, she has a possibility of acquiring the house, but it does not follow that she has any right to secure its preservation. Moreover, such a proposition would lead to strange results. First, if objects of powers had rights of enforcement, there should be no problem about creating non-charitable purpose trusts; one would only have to add a power, and there would be a person (or more than one) with a right to supervise and enforce the proper administration of the trust. In other words, the proposition that objects of powers can enforce the proper administration of a trust is straightforwardly inconsistent with the beneficiary principle.16 Moreover, many trusts of the kind with which this article is concerned have powers with a very wide range of objects: the objects of such a power might well be anyone in the world, perhaps excluding the trustees. Are we to think that in such a case, anyone in the world has the right to enforce the proper administration of the trust? Is everyone in the world owed the fiduciary obligations of trusteeship? That is not English law.17 It is certainly not what the drafters of such trusts must think.18 ‘Discretionary trust’ The term ‘discretionary trust’ is also ambiguous, its ambiguity corresponding to the different senses of ‘trust’. When the phrase ‘discretionary trust’ uses ‘trust’ in the wide sense, then the phrase means ‘a trust structure in which the trustee, or someone, holds (some or many) dispositive discretions’. It is not a term of art.19 When I was small, I was taught that ‘discretionary trust’ is a term of art, and has a very precise meaning. Using ‘trust’ in the narrow sense, it means a trust—an obligation with respect to property—that is discretionary even while it is obligatory. Thus, it refers to the particular situation in which the trustees are obliged to distribute property—all of it—but at the same time have a discretion as to which members of a group or class shall receive the property in question. This sense of the phrase is now much less common than the wide sense, probably because such structures are rarely created; but it was used in the leading case of McPhail v Doulton,20 and it is still encountered.21 Since the trustees are obliged to distribute the property, it is sometimes described by saying that the trustees have only a power of selection. A discretionary trust in this narrow sense creates a situation in which all the members of the class are trust beneficiaries in the strict sense, even though none of them individually has a right to any of the property. This is because, collectively, they are entitled to the property.22 In this respect, they are very different from the members of the class of objects of a dispositive discretion, who are not entitled to anything, even collectively. The ambiguity of the phrase ‘discretionary trust’ can cause confusion. Lord Collins was almost certainly using the wider sense in TMSF.23 If there were a discretionary trust in the narrow sense, whose beneficiaries were Mr Demirel and his family, then there could be no ‘residuary beneficiary’, because there would be an obligation to dispose of all the property among the beneficiaries of the discretionary trust.24 Alternatively, if (as seems to have been the case) Mr Demirel and his family were only objects of powers, and there was a single residuary beneficiary, then there was not a discretionary trust in the narrow sense. There was a fixed trust, for the residuary beneficiary, but the interest of that beneficiary was defeasible by the exercise of the powers. In the title of this article, I adopt the wider sense of the phrase ‘discretionary trust’. I am not (or not usually) discussing discretionary trusts in the narrow McPhail v Doulton sense, but rather the kind of trusts in which the trustees (or others) hold very wide discretionary dispositive powers.25 ‘Default beneficiary’ or ‘residuary beneficiary’ Finally, we turn to what Lord Collins meant when he said that the trusts had a ‘residuary beneficiary’. What did he mean? In a will, it is normal to have a residuary legatee, or a residuary beneficiary. This is the beneficiary who takes the residue of the estate, after creditors have been paid and particular legacies have been fulfilled. In an estate, of course, the residue is uncertain until it is ascertained by estate administration. There might be nothing at all if the deceased’s debts are large. In a trust, traditionally, there is no residuary beneficiary. Why not? Traditionally, trust instruments dispose of income interests and capital interests. If you have disposed of all of the income and all of the capital, you have disposed of everything and there can be no residue. Moreover, the capital interests do not have the aleatory or uncertain character that goes with the residue of an estate. This is because in a traditional trust, there is nothing corresponding to particular legacies, nor anything corresponding to the debts of a deceased person: that is, pre-existing claims that have priority over the rights of the estate beneficiaries.26 It is the evolution of trust drafting that has led to the creation of a ‘residuary’ or ‘default’ beneficiary. Dispositive discretions have moved from the margins of trust drafting to the centre. Dispositive discretions are not by any means a new phenomenon. During much of the 20th century, they frequently qualified or limited the traditional interests that carved up the income and the capital. For example, someone holding a capital interest might find that the capital could be reduced if the trustee exercised a power over that capital. In this sense, the capital interest was defeasible. In a traditional family trust structure, the objects of dispositive discretions would typically be the same people who held the income or capital interests. So when the capital was reduced through the exercise of a dispositive discretion, it might well be the case that the discretion was exercised in favour of one of the persons who held the capital interest.27 More recent drafting styles may take dispositive discretions to an extreme: the objects of the trust, the people who are intended to benefit, may have nothing but the hope of receiving property via the exercise of dispositive discretions. In one version, illustrated by Tasarruf Mevduati Sigorta Fonu, they do not hold any defined interests in the income or capital, not even defeasible ones; they are only the objects of powers, which are dispositive discretions. This means that they have no right to the trust property or to any part of it; they only have the hope that these discretions will be exercised in their favour. The residuary beneficiary might be one or more named charities, or ‘charity’ in general, which is why the term ‘Red Cross trust’ is sometimes used to describe this kind of trust.28 In another version, which for the time being at least is more commonly found in onshore trusts, there is some commonality between the objects of the very wide dispositive discretions held by the trustees, and the residuary beneficiaries. That is, the intended objects are residuary beneficiaries as well as being the objects of the trustees’ dispositive discretions.29 But as in the Red Cross trust, it is likely that the trustees have the power to add or remove people from the class of objects of their wide dispositive discretions, and possibly to modify the class of residuary beneficiaries. The trustees also have the power to bring the trust to an end at the time of their choosing, since their dispositive discretions extend to all of the trust property; again, therefore, the interests of the beneficiaries in that capacity—in the capacity of beneficiaries—are entirely defeasible.30 As in the Red Cross trust, the expectation in this ‘family’ version is that the trust property will be distributed by the trustees pursuant to their wide dispositive discretions, rather than via the ‘default clause’ that identifies the residuary or default beneficiaries. These are what I mean by ‘massively discretionary trusts’: trust structures in which the trustees’ dispositive discretions do not merely qualify the beneficial interests, but effectively displace them, one might even say overwhelm them.31 Contrary to what Lord Collins said about Mr Demirel and his wife, people in their position are not, at least in the Red Cross version, beneficiaries in the strict sense of that word, since they do not hold any definable beneficial interest. They are only objects of powers. But according to the beneficiary principle, someone has to be the beneficiary; someone has to have a right to the trust property, even if it is a defeasible right, or we will not have a trust. Or, to state the same issue from the other end, if we do have a trust, and we cannot identify any beneficiary in the trust instrument, then the beneficiary will be the settlor under a resulting trust. That is the lesson that Mr Vandervell learned the hard way.32 In my view, it is a mistake to think that the residuary or default beneficiary is only there to deal with the very unlikely case in which all of the intended objects were to die.33 If the intended objects are not beneficiaries in the strict sense, but are only objects of discretions, then the default clause is needed from the moment of constitution in order to ensure the validity of the trust. It is needed to satisfy the beneficiary principle. It names one or more beneficiaries, which the objects of the discretions are not.34 The label ‘residuary beneficiary’ is doubly curious. ‘Residuary’ is misleading because, unlike in the case of a will, there is no intention that there shall be any residue at all. ‘Beneficiary’ is misleading because, at least in the Red Cross version, there is no intention that this entity shall receive any benefit from the trust, even though it may be the only beneficiary in the proper usage of that term.35 That beneficiary is there for a very specific purpose, which does not include receiving any benefit from the trust. It is there to satisfy the beneficiary principle. Charitable and non-charitable trusts As mentioned, the term ‘Red Cross trust’ is sometimes used to describe the kind of trust in which the role of default beneficiary is played by one or more charities. The settlor who creates such a trust, however, does not intend to create a charitable trust. It is said to be a fundamental principle of the common law that in order to be valid, a charitable trust must be exclusively charitable.36 That is not the nature of a Red Cross trust. The intention is that the objects of discretionary powers will receive all of the benefit, even though they are not beneficiaries in the strict sense. And still less, is it desired to bring such a trust under the authority of the Attorney-General, or the supervision of the Charity Commission? It is intended to be a private, or non-charitable, trust. But here is a question worth considering: is there anything problematic about a non-charitable trust that has no beneficiaries, in the strict sense, except one or more charities? I am assuming all along that the trustees have wide dispositive discretions. The question is, for whom do they hold the trust property in trust, subject to the exercise of those discretions? In the terms we have been using, who is the residuary or default beneficiary? Let me present three different possibilities for the drafting of such a trust. The first is that no particular charity is named as the default beneficiary. It is conceivable that this is what Lord Collins meant when he said that ‘[t]he residuary beneficiary is charity.’ Such a clause might be as follows: that subject to the trustees’ dispositive discretions, typically in favour of family members, ‘the Trust Fund shall be held on trust for such charitable objects and in such amounts as the Trustees shall in their absolute discretion think fit’.37 I suggest that this clause is invalid, when combined with powers in favour of named individuals. Why? It does not satisfy the beneficiary principle. It does not name a beneficiary. Charitable trusts, or, what is the same thing, trusts for charitable purposes, do not have to satisfy the beneficiary principle; they are valid as purpose trusts. But on the other hand, such trusts are valid only if they are exclusively charitable.38 You cannot take the benefit of some features of the law of charity while opting out of the ones you do not like. It might seem controversial for me to suggest that it is not valid. Someone might say that it is perfectly possible to have a trust structure in which the trustees are empowered to make gifts to charity. This, however, would be a trust for persons, with charity (or one more named charities) named as the object of dispositive discretions. In such a trust, the beneficiaries are persons, albeit with defeasible interests. The charities are only objects of powers. Such a structure does not include a charitable trust. Another trust structure might have both non-charitable beneficiaries and an obligatory charitable disposition. For example, I might create a trust in which the income is to go to a particular person, Mary, during her life, and then on Mary’s death, the capital is to go to charitable purposes.39 That could be perfectly valid. But the two dispositions are of different property. The income, as it arises, is held in trust for Mary; the capital, for the charity. Moreover, the capital gift is vested (to the extent that this concept can apply to charitable purposes), but vested only in interest, not in possession. During Mary’s life, the trustees are not obliged to apply the capital to charitable purposes; indeed, that would be inconsistent with investing it so as to generate income for Mary. In the type of trust that I described earlier, however, that is not the structure at all.40 Rather, all of the property (capital and income) is held in trust for charity, while at the same time all of the property (capital and income) is available to the trustees for the exercise of their dispositive discretions in favour of non-charitable objects. That, I suggest, is not possible. It would mean that from the moment that such a trust were constituted, the trustees would be holding the property on charitable trusts and would be obliged to use the property for the charitable ends—except such property as they distributed to non-charitable objects. One might say, in line with the discussion in the preceding paragraph, that so long as the trustees hold their dispositive discretions, they are not obliged to apply the property to charitable objects. But that does not solve the problem. From the moment of its creation, this structure has mixed objects, non-charitable objects and charitable objects; but the non-charitable objects are not trust beneficiaries. They cannot satisfy the beneficiary principle; objects of a power do not have standing to enforce the trust. The result is that the only trust in the narrow sense—the only obligation with respect to the property—is the charitable trust; but a charitable trust must be exclusively for charitable objects, or else it fails.41 This problem seems obvious if you think of it the other way around. Imagine that I told my solicitor I wished to create a charitable trust. I name a perfectly valid charitable object, in such a way that there is a clear public benefit. Then I tell the solicitor, ‘I would also like the trustees to have the power to give any or all of the property to a named class of persons, for their benefit, namely me and my immediate family.’ Surely the solicitor will say that this is not possible. And it is no more possible when the charitable purpose comes at the end, as a so-called default clause, than when the charitable purpose comes first and is later qualified by powers for non-charitable objects. Validity does not depend on the order in which provisions are drafted. If the default clause is invalid, then there is probably a resulting trust. The discretionary powers may stand, if they are severable, but the role of the default beneficiary will be taken by the settlor or her estate.42 It goes without saying that this may have unintended consequences, in relation to taxation, division of family property, access by the settlors’ creditors, or other matters. The only other possibility would appear to be that the discretionary powers could be held invalid as repugnant to the charitable trust; this outcome would mean that the trust was a charitable trust from the moment of its constitution. In most cases, that would be an even worse outcome from the settlor’s point of view, because it would mean that the trust would be subject to public regulation and all of the property would have to be applied to charitable purposes. A second drafting solution is to use one or more named charities. I would suggest that even here there could be a validity problem, if the named charity is itself in the form of a trust. A disposition in favour of a named charitable trust is not a trust for persons; it is a settlement of property on charitable trusts.43 It must be exclusively charitable or it will not be valid. It would seem, then, that the same validity problem will arise if the default beneficiary is a named charitable trust. The disposition purports to be charitable, but is not exclusively charitable. Most charities, however, are now legal persons. This is a third drafting solution. If one or more persons are named as default beneficiaries, then the beneficiary principle will be satisfied; the fact that they happen to be charities is not relevant to this question.44 We will see below, however, that this structure creates other potential problems. To conclude this section: the first legal risk in some massively discretionary trusts is a serious one: invalidity of the default clause, leading to a resulting trust of the only beneficial interest, in the strict sense. This may arise if the purported structure is that the trustees hold the property on trust for charitable purposes from the moment of constitution, while also having dispositive discretions in favour of non-charitable purposes. To avoid it, I would suggest, drafters who wish to use charities as the only default beneficiaries must select one or more named charities that are in corporate form. Let us see, however, where that leads. Rights to information Why do drafters create massively discretionary trusts? One reason is to give the trustees flexibility to react to unforeseen circumstances. This surely lies at the origin of the addition of dispositive discretions to family trusts, many decades ago. Another reason is that such a structure may make it difficult or impossible to place a value on the interest of a beneficiary, or an object of a power; this may have significant taxation consequences.45 This may also make it practically impossible for that person to alienate his or her interest for a capital sum, which might be an important drafting objective. Some drafters may hope that this difficulty of valuation may mean that an object’s interest will not be considered divisible property in the case of the breakdown of a cohabitational relationship.46 Some may also intend that the presence of very wide discretions will make it impossible for the objects or beneficiaries of the trust to invoke the rule in Saunders v Vautier47 and collapse the trust; we will return to this in a later section. At this point there is a narrower question: assuming that a drafter is going to create a massively discretionary trust, why would he or she use charity, or one or more named charities, as default beneficiaries, when there is no intention to benefit the charity in question? Why not simply name, as default beneficiaries, one or more of the people who are objects of the dispositive discretions, as in the ‘family’ version of the massively discretionary trust?48 When charity or charities are named as a backstop to family members who are themselves genuine beneficiaries (and not merely objects of powers), the trust is probably a settlement (a trust created by a living settlor), and the explanation may lie in taxation law.49 Under modern taxation statutes, a settlement may attract adverse taxation consequences if there is any chance that the settlor will derive a benefit from it. If, for example, the beneficiaries are the settlor’s children and remoter issue, it is conceivable (regardless of the actual facts) that all of those children and issue will die before the settlor. Thus, whether or not that happens or is likely to happen, the mere possibility may mean that the settlor has some chance, however remote, of benefitting from the settlement, because if all the named beneficiaries were to predecease the settlor, there would be a resulting trust for him or her. And this may attract a taxation rule whose effect may be that the trust is ignored for taxation purposes. Some reported cases, arising in offshore jurisdictions, reveal a different approach, in which the real objects of the trust—those who are intended to benefit—do not have a beneficial interest, but are only objects of dispositive discretions. Some settlors wish to conceal their trusts, so far as they can, even from the persons whom they expect might or will benefit.50 Some settlors may have created trusts of this kind on the view that the difference between being a trust beneficiary and being the object of a dispositive discretion made a big difference in relation to rights to information. Thus, making persons only objects of powers, and not beneficiaries, might reduce their ability to find out about the trust (its existence and terms, the property held in trust, and so on). It is important to remember that in this kind of structure, at least in jurisdictions where the beneficiary principle applies, the default or residuary beneficiary plays a very important role, because it is the only beneficiary in the strict sense and it is therefore necessary for the validity of the structure (at least, if a resulting trust is to be avoided). The view that objects of powers have no rights to information was called into question in 2003 by another Privy Council case, namely Schmidt v Rosewood Trust Ltd (Isle of Man).51 Here Lord Walker of Gestingthorpe described a sub-species of massively discretionary trust in these words: The trusts and powers contained in a settlement established in such circumstances may give no reliable indication of who will in the event benefit from the settlement. Typically it will contain very wide discretions exercisable by the trustees (sometimes only with the consent of a so-called protector) in favour of a widely-defined class of beneficiaries. The exercise of those discretions may depend on the settlor’s wishes as confidentially imparted to the trustees and the protector. As a further cloak against transparency, the identity of the true settlor or settlors may be concealed behind some corporate figurehead.52 A trust that aims to create a cloak against transparency is what some people call a black hole trust.53 It is certainly not the case that every massively discretionary trust aims to create such a cloak, but some clearly do.54 To some extent, Schmidt defeats such goals, because it rejected the view that an object of a dispositive discretion has no standing to obtain information about a trust. The decision restated the conceptual basis for trustees’ obligations to disclose information to trust objects. According to Schmidt, those obligations are not based on beneficiaries’ equitable ownership of the trust property; rather, it was said, they are based on the court’s inherent jurisdiction to supervise the administration of trusts. A leading textbook suggests, rightly in my view, that it is the accountability of trustees that is the foundation of their obligation to produce information.55 Although Schmidt could be said to have improved the position of objects of powers regarding access to information, it might also be said to have worsened the position of beneficiaries. According to the advice of the Board in Schmidt, even beneficiaries no longer have a right, in the strict sense, to information about the trust. Lord Walker made one comment that seems to address massively discretionary trusts: he said it would be in the discretion of the court whether any information should be available to a ‘beneficiary with only a remote or wholly defeasible interest’.56 That would seem intended to speak to the ‘Red Cross’ kind of residuary beneficiary. I can understand this position, but I agree with Lusina Ho that it needs more analysis.57 In 1998, Millett LJ said in Armitage v Nurse: ‘Every beneficiary is entitled to see the trust accounts, whether his interest is in possession or not.’58 The suggestion in Schmidt, which made no reference to Armitage, would qualify that statement severely. Indeed, Schmidt effectively contradicts it, unless the later case intended to suggest only that some kinds of information might be properly withheld from beneficiaries. As a matter of English law, Schmidt, being an Isle of Man decision, is not capable of overruling Armitage.59Schmidt is binding only in the Isle of Man. Moreover, even in jurisdictions where neither decision is binding, the suggestion in Schmidt regarding beneficiaries is questionable. Let us assume that we have a trust in which the default beneficiary is a named charity. Because it is only a default beneficiary, or in the words of Lewin on Trusts, a ‘long stop’ beneficiary,60 the suggestion is that it does not hold this fundamental right to be told about the trust and to see the accounts. But we need to remember that in the structure we are concerned with, this beneficiary may be the only beneficiary of the trust in the strict sense. If it is, then the trust depends for its validity on the presence of this beneficiary, since every trust that is not exclusively charitable must have a beneficiary. Objects of powers cannot satisfy the beneficiary principle, and turn what is not a trust into a trust.61 So can we really say, of the only beneficiary, who is making the whole structure stand up, that it is not really a beneficiary because its interest is defeasible? A defeasible interest is nothing unusual: it is found in almost every trust, because almost every trust has some dispositive discretions. The interest of the default beneficiary is defeasible, but if that beneficiary is named or identified and exists, this interest is almost certainly vested, not contingent. Here I disagree with Sir Anthony Mason, who has said: ‘A person entitled in default of distribution in a discretionary trust has no more than a contingent remainder, if that.’62 If there is a discretionary trust in the narrow sense,63 then the property must be distributed and no one is entitled in default. Sir Anthony is here discussing discretionary trusts in the wider sense, since he also says that the ‘[t]he members of the class eligible to be appointed are objects of the power, not beneficiaries in the strict sense.’64 But someone must be a beneficiary in the strict sense, throughout the life of the trust, and in a massively discretionary trust, this someone is the default or residuary beneficiary.65 Whether an interest is vested or contingent is determined by the structure of the trust and the interests it creates, not by the practical likelihood that its holder will receive property. The interest of the default beneficiary is defeasible because of the dispositive discretions, but this does not make it contingent, at least if we are to adopt the conceptual framework that was developed in land law and that has always been applied to trusts in relation to perpetuities. A contingent interest is one that does not vest until the satisfaction of a condition precedent; a contingent interest is always a future interest.66 Whether an interest is vested or contingent is a question of construction, but the presumption is in favour of vesting.67 The need for the passage of time, or of a life, certainly does not make a remainder interest contingent; it goes to whether it is vested in possession or only vested in interest. The fact that a present interest may be defeated by the later occurrence of an uncertain event does not make it contingent, but rather defeasible. This is borne out, for example, by Pearson v IRC,68 which was decided at an early stage of the evolution of the modern discretionary trust. A majority held that the interests of the default beneficiaries, which interests were subject to overriding discretionary powers held by the trustees, were not ‘in possession’; but they were vested, not contingent, despite those wide powers. Lord Keith of Kinkel said of the beneficiaries: Each of them having attained 21 years of age had a vested interest in the fee [sic; fund?] of one third subject to the possibility of divestiture through the exercise of the trustees’ overriding power of appointment and also, during the lifetime of the settlor, to the possibility of defeasance pro tanto through the birth to him of any further child who attained the age of 21.69 To repeat: the beneficiary principle requires that there be a beneficiary from the moment of the trust’s constitution.70 Thus, the interest of a named default beneficiary, even if defeasible by the exercise of a power, must be vested, not contingent.71 The interest of a default beneficiary can be contingent only if there is a prior vested interest that satisfies the beneficiary principle.72 Are the labels ‘residuary beneficiary’, ‘default beneficiary’, and ‘long stop beneficiary’ anything other than ‘beneficiary’ with a vituperative epithet?73 The logic of the trust device is that it exists to benefit beneficiaries, with the result that beneficiaries have certain rights that flow from the accountability of trustees. It is fine to add objects of powers, but they cannot enforce the trust; they have no right to any property.74 The trustees do not owe obligations to those objects regarding the benefit of the property.75 But why would anyone think that we can take rights away from the so-called real beneficiaries, making them only objects of powers, and not end up with those rights being held by the default beneficiary? The default beneficiary must be a real beneficiary. The only alternative is that there is no trust (in either the wide or the narrow sense). As Millett LJ also said in Armitage: ‘If the beneficiaries have no rights enforceable against the trustees there are no trusts.’76 He was not talking about the objects of powers. I am not sure that this aspect of Schmidt can be taken as the last word on the subject. This, then, could constitute another risk of massively discretionary trusts. If the default beneficiary is left as a purpose, then the invalidity risk that I described in the previous section arises. If this is avoided by naming a particular person, such as a corporate charity, or some of the same persons who are named as objects of the powers, then I would expect those persons to be treated by the courts as beneficiaries, since it is they who stand between validity and invalidity. This implies that they have a right to be told about their interests from the moment the trust arises, and to be provided with the trust deed, accounts and other information.77 Saunders v Vautier Why would a named charity want to fight for information about a trust from which it cannot realistically expect to benefit? I can think of at least one reason, namely the rule in Saunders v Vautier.78 This allows a trust to be terminated, contrary to its terms, and the property to be distributed among its objects as they agree.79 It is perfectly possible for a charitable entity to agree with other beneficiaries to bring a trust to an end in this way. It happened in 2002 in Re Barton,80 the first English case decided under the Hague Trusts Convention. The will trust was ended against the vociferous objections of the testator’s widow, who was one of the trustees. The property was divided between the testator’s son and a corporate charity, even though this was clearly contrary to the intentions of the testator. The rule in Saunders v Vautier can operate by agreement among all the beneficiaries of a trust, and requires that they all be of full legal capacity. In relation to the risks related to using massively discretionary trusts, I would argue that there is uncertainty about what this principle requires when the trust structure includes dispositive discretions. In fact, I would argue that there are two levels of uncertainty. The first level is whether the rule takes account of the interests of objects of powers at all; if it does, the second level is whether it draws any distinction between different kinds of objects. I will look at each in turn. First, take the simple case in which property is held in trust for A, but the trustees hold a dispositive power in favour of B. A is the only beneficiary, and is of full legal capacity. On one view, A could invoke the rule in Saunders v Vautier and demand all of the property, because A is the only beneficiary. B’s interest is not relevant on this approach, because B has only a hope that the power will be exercised in his favour; he has no right to any of the property. In Underhill and Hayton, this is presented as one possible view of the law, with an obiter dictum from Lord Upjohn in support.81 Now the danger of the massively discretionary trust with one or more named default beneficiaries is clear: on this view of Saunders v Vautier, those beneficiaries would be entitled to demand all of the property at any time, defeating the hopes of the objects of the discretionary powers. Lewin on Trusts states that such a result would be ‘wholly contrary to the settlor’s intentions’.82 It is crystal clear, however, that such a consideration is irrelevant to the operation of the rule. One way of stating the beneficiary principle, going back to the well-known words of Sir William Grant MR in Morice v Bishop of Durham, is as follows: ‘There must be somebody, in whose favour the court can decree performance.’83 That somebody, in a massively discretionary trust structure, is the default beneficiary, and not any mere object of a power, because the court cannot decree performance in favour of the object of a power. The object of a power does not have any right to any of the trust property.84 And it is arguable that that somebody, the one in whose favour the court will decree performance, is the one who can invoke the rule in Saunders v Vautier. An alternative view of the rule in Saunders v Vautier is also presented in Underhill and Hayton.85 This view is more arithmetical. It sees the rule as involving not merely beneficiaries in the strict sense, but as requiring agreement among all of those who might possibly benefit. We can return to the earlier example of property held in trust for A, with the trustees holding a dispositive power in favour of B. On this second view, because B might get some, or perhaps all of the property, only by agreement between A and B could the trust be ended. In Schmidt, Lord Walker said in obiter dicta that the object of a power has the ability to ‘block’ the operation of the rule in Saunders v Vautier.86 There is some logic to that, of course. But there is also some logic to the first position, and there is clearly uncertainty as to what the law is. And I come now to the second uncertainty in the law. Let us assume that it is correct that objects of a power may be able to block the operation of the rule in Saunders v Vautier. Does this mean any object of any power? Take the same structure, with property held in trust for A and a dispositive power in favour of B. Now assume that we add another power, one which allows the trustees to add anyone in the world to the class of objects of the dispositive power; such a power is common in massively discretionary trusts. If we take a wide view of Lord Walker’s dictum, then this structure could never be subjected to the operation of the rule in Saunders v Vautier. But as we have already seen, in relation to access to information, Lord Walker seemed willing to distinguish between beneficiaries or objects who have only a remote possibility of actually benefitting, and those who do not. I have expressed some doubt about that, but if this is right, does it mean we should also distinguish between objects of powers for the purposes of the rule in Saunders v Vautier? If so, we might find that there is only a relatively small number of objects who have a realistic prospect of benefitting from the trust. If those few are fully capacitated, then it may be that in agreement with the residuary beneficiary, they can collapse the trust whenever they wish. The result would be something like what happened in Re Barton: the settlor’s family members could, in combination with the residuary beneficiary, bring the trust to an immediate end. We have seen that there is a kind of massively discretionary trust in which the residuary beneficiaries are not charities, but rather are members of the settlor’s family.87 In this variation, it is possible to exclude the risk of trust termination via the rule in Saunders v Vautier, by ensuring that some of the potential default beneficiaries are unidentifiable during the life of the trust.88 Even here, however, a variation of the trust, which may bring it to an end, is not out of the question.89 Misleading appearances In this section, I begin by returning to the idea that even though the default beneficiary is the only beneficiary, it may not be considered to be a ‘real’ beneficiary in relation to standing to seek information.90 As we saw earlier, the idea is that in such a case, of a ‘long stop’ beneficiary, everyone knows that the trust property will be distributed to the objects of the dispositive discretions. It is worth stopping for a moment to ask: how do we know that? Typically, we do not know that by reading the trust deed. The trust deed may indeed be drafted to conceal that;91 at the very least, it does not typically announce it. If the goal is to ensure that those who are to benefit are not to have the rights of beneficiaries, then the trust deed must make it clear that they are merely objects of powers, with no right to any property. And as we have seen, this leaves the default beneficiary as the only beneficiary propping up the whole structure. Imagine that the trustees chose not to exercise any of their discretionary dispositive powers, which on the face of things is up to them, since they hold the discretions in question and do not have to exercise them.92 The result would be that all the property would go to the default beneficiary, say a named charity. The assumption, in the books and cases that treat this beneficiary as having no substantial interest, seems to be that something will have gone badly wrong. But on the face of it, the trustees have complied with their obligation to their only beneficiary, and have simply chosen not to use powers which, in their nature, are not obligations but only powers. Let us return to first principles. How do trustees ever know what they are supposed to do? Sometimes, they have clear obligations: for example, to pay the income to a particular person. In our context, although they must have some obligations (as a result of the beneficiary principle), they also have wide and overriding discretionary powers, which are not obligations. How do they know, or how do they decide, what they are to do with these powers? Trustees, of course, are bound by obligations of loyalty that they owe to the beneficiaries.93 This means that in general, they must be guided by what they consider to be the best interests of the beneficiaries. In the case of dispositive discretions held in a fiduciary capacity, this formulation does not help the trustees very much, because the exercise of the discretion will typically harm the interests of the beneficiary by defeating its interest and directing the property elsewhere. That is, if the dispositive discretion had to be exercised in what the trustee considered the best interests of the beneficiary, then it would be a rare case in which the discretion would be exercised at all. But the trustees certainly cannot be bound to use their dispositive discretions in what they think are the best interests of the objects of those discretions, disregarding the interests of the beneficiaries. That would have the opposite effect: it would be a rare case in which they could not exercise their discretions. Indeed, such a norm would be inconsistent with the idea that these are only discretions, not duties, and it would turn the objects into beneficiaries. And so the courts have adopted a different test for fiduciary discretions: they are required to be exercised in what the holder considers to be the best manner of fulfilling the purpose for which the power was granted.94 In traditional drafting, a discretionary power might itself signal the purpose for which it was created. For example, a power to use capital for the education of an object gives some indication of the purpose, and guides the holder of the power. The holder of the power can reason in terms of what would best accomplish the goal of educating the child, in the light of their needs, the property available, other resources, and so on. In the massively discretionary school of modern trust drafting, however, wider discretions are better, as they give more flexibility and they do not restrict trustees to predefined purposes. They do not restrict them, but they do not guide them much either. If the trustees have power to dispose all of the income and all of the capital to a class of objects, for any reason at all, and indeed a power to add objects to that class so that in principle it includes just about everyone in the world, then they seem to have the power to give all of the trust property to whomever they wish, but rather little guidance as to the purpose for which this power was granted.95 It is not surprising that the rise of massively wide discretions has led to the rise of letters of wishes, memoranda of wishes, and other expressions of settlors’ desires. Not very long ago, these were relatively peripheral phenomena, at least in the onshore world. But due to the rise of massively discretionary trusts, the discussion of these documents in legal textbooks is now substantial. The reason should by now be obvious. How else would the trustees know that the charity named as default beneficiary is not actually supposed to get anything? These expressions of wishes are the means by which the trustees will know what the settlor really wanted but did not say in the trust instrument. The less the instrument says, the more important the wishes become. And yet, these wishes are typically not terms of the trust.96 The standard doctrine is that while the settlors’ wishes are a relevant factor, the trustees must make their own decisions. But how are they to make them? Their decisions have to be based on something; their own personal preferences and desires are not relevant. If the express terms of their discretions give them no guidance at all, it may well be the case that the wishes of the settlor take on a predominant significance. The trustees have nothing else to go on; nothing else is legally relevant. Paradoxically, the settlor’s wishes, which are not binding and are not terms of the trust, are controlling. They tell the trustees how to act. Some might say that a trust which is effectively governed by the settlor’s wishes—wishes that are not actually terms of the trust—is in danger of being a sham.97 A finding of sham is certainly likely if the trustees, who on the face of the deed hold overriding discretions of the widest kind, are actually simply doing what the settlor tells them.98 The courts will not ignore the fact that the settlor is in control.99 Quite apart from a finding of sham, this control might mean that the settlor is a de facto trustee.100 In turn, this could mean that the settlor is in a fiduciary relationship with the beneficiaries and accountable to them.101 Settlor control could also have significant taxation implications.102 To avoid such findings, it is said that the trustees must make their own decisions, and not simply follow the settlor’s directions. But in this context, this looks almost like sophistry. They are not to follow the settlor’s directions, but the only thing they have to go on is the settlor’s wishes. The problem is only worse when we find that this seems to mean the settlor’s wishes as they evolve from time to time (at least if the settlor is still alive).103 But if the wishes are not legally binding, why should they not change? Can the settlor write a new letter every day?104 One case on beneficiaries’ rights to information discussed the oral expression of the settlor’s wishes, treating this as unobjectionable.105 Presumably such wishes can be countermanded as easily as they can be communicated, for example by a quick telephone call. Even if we can convince ourselves that it is possible to imagine the trustees acting independently, when the only legally relevant constraint on them is the settlor’s wishes, we must still ask what kind of trust this is. In Antle v Canada, Noël JA said that for a finding of sham, ‘[i]t suffices that parties to a transaction present it as being different from what they know it to be.’106 Thus, there can be a sham even if the trustees act independently. This means that it is certainly arguable that a ‘Red Cross’ trust is a sham from the moment of its creation, inasmuch as the settlor’s wishes tell the trustees that the only beneficiary named in the trust deed is not actually supposed to benefit. It is understood between the settlor and the trustees that the intended outcome is not accurately reflected in the trust deed. If the named charity is not intended to benefit, so that the default clause is a sham and ignored, then there will be a resulting trust.107 Moreover, a version of the same problem arises even in the ‘family’ version of the massively discretionary trust, in which the default beneficiaries are family members. If there were to be a conflict between the settlor’s expressed wishes and the trustees’ assessment of the best interests of those default beneficiaries, which consideration was intended by the settlor to prevail? To ask the question is to answer it. Even if we assume independence in trustee decision-making, this seems to be a situation in which the trustees are intended to hold the property in order to implement the settlor’s wishes, rather than for the benefit of the named beneficiaries. On that view, one could argue that the genuine intention of the settlor was to create a non-charitable purpose trust, which is not allowed by the common law of trusts.108 If the trust was actually a trust for the beneficiaries, and the trustees were acting independently, then the trustees’ assessment of the best interests of the beneficiaries would necessarily prevail over the mere expression of a wish by the settlor. And if the settlor’s genuine intention was to create a non-charitable purpose trust, and the trustees knew that and went along with it, then the trust deed is misleading in naming the default beneficiaries as the beneficiaries.109 This yields, again, a resulting trust for the settlor. Accountability I pass to a final risk that may be associated with massively discretionary trusts. This is the risk of litigation, which may well be increased by the presence of wider discretions. Schmidt v Rosewood Trust Ltd110 heralds a move towards understanding trustees’ obligations to provide information as based on their accountability, which is a core feature of the trust. Modern trust structures with enormously wide discretions mean that none of the objects of powers has any right to any of the trust property; they only have a hope that a discretion will be exercised in their favour. The residuary beneficiary, of course, has a right to trust property; that is necessary for the structure to work; but it is defeasible by the exercise of those wide discretions. In other words, the trustees’ decisions are the only things that matter. When everything rides on trustees’ decisions, rather than on the terms of a document, those who are aggrieved may well choose to litigate. At the very least, they will wish to understand the reasoning behind the decisions that were made. My suggestion is that the accountability of trustees points inevitably in the direction that trustees will have to provide reasons for their decisions. I am aware of the principle articulated in Re Londonderry’s Settlement,111 that trustees cannot be forced to disclose their reasons for the exercise of their discretions; and its affirmation in Breakspear v Ackland,112 leading to the conclusion that a letter of wishes need not generally be disclosed. I am not convinced that this is the last word on the matter. Leaving aside some non sequiturs in the reasoning in both cases,113 the primary reason for allowing secrecy was expressed this way in Breakspear: It is in the interests of the beneficiaries because it enables the trustees to make discreet but thorough inquiries as to their competing claims for consideration for benefit without fear or risk that those inquiries will come to the beneficiaries’ knowledge. They may include, for example, inquiries as to the existence of some life-threatening illness of which it is appropriate that the beneficiary in question be kept ignorant. Such confidentiality serves the due administration of family trusts both because it tends to reduce the scope for litigation about the rationality of the exercise by trustees of their discretions, and because it is likely to encourage suitable trustees to accept office, undeterred by a perception that their discretionary deliberations will be subjected to scrutiny by disappointed or hostile beneficiaries, and to potentially expensive litigation in the courts.114 It is difficult to know what to make of this. The final sentence is much more about protecting trustees than beneficiaries; and it is not mainly about protecting them from harm (since they are entitled to be indemnified when they litigate in good faith), but from having to explain themselves. What is wrong with subjecting them to scrutiny as to the ‘rationality’ of their decisions?115 The first sentence claims that this protection of trustees is for the benefit of the beneficiaries, but no reason is given other than, again, the benefit of the trustees. The only reason is in the middle sentence, which seems contrived and difficult to understand.116 As to the reference to reducing litigation, this is not at all clear. If beneficiaries are dissatisfied, they can always litigate, seeking disclosure or alleging improper decision-making.117 Conversely, when beneficiaries understand the reasons for trustees’ decision-making, then if those reasons were rationally defensible, this if anything would seem to reduce the likelihood of litigation; even if the beneficiaries do not agree with the decision, it is clear enough that the decision does not belong to them. Trustees may find their role a difficult one, and disclosure of their reasons may make it more difficult still. But it seems to me that accountability cannot stand comfortably with secrecy. This is especially so in the context of massively discretionary trusts, where, as we have seen, a letter of wishes may at one and the same time be not legally binding, and yet the most important document in determining who will benefit from the trust.118 It is at least strange to think that beneficiaries have the right to see the trust deed,119 but not the letter of wishes without which the deed is unhelpful and probably actively misleading.120 Trustees with massively wide discretions can exercise them well or badly. One of the ways in which they can exercise them badly is by exercising them for the wrong reasons.121 And the wider are the discretions, the more likely it is that this is just about the only way in which they can exercise them badly, since the terms of their powers are not constraining at all. Are trustees really accountable if they are not required to provide reasons? They are administering property that does not belong to them beneficially. And every time they exercise their discretionary powers in favour of one object, they are taking away from someone else. They are diminishing the rights of the taker in default, since whenever property is subject to a power, there is a taker in default who will otherwise get it. The object of the power has a hope; the taker in default has a defeasible right. Thus, trustees who exercise a power are making that person less well off than they were before. It is hardly a lot to ask that some reasons should be provided.122 The principle as stated in Breakspear may therefore be one that is still evolving. Whatever virtues they may have, massively discretionary trust structures seem more likely to invite litigation than fixed trusts, because the trustees’ decisions control the destination of the trust fund far more than any of the provisions in the trust instrument. Those who are disappointed will want to know why, and trustees who are making independent decisions for defensible reasons should not be afraid to disclose them. Conclusion History teaches that Henry I died from consuming a ‘surfeit of eels’. This can be taken as a particular example of a more general principle, that just because something is good, it does not follow that more of it is better. I am not opposed to discretion in trust structures. However, massively wide discretions do potentially create a series of legal risks. Let me summarize some of them. First, one version of such a structure aims to avoid having any beneficiary at all, through the use of a default clause that directs the trustees to apply the property to charitable purposes. I have argued that such a clause is invalid, as it purports to create a trust for charitable purposes but which is not exclusively charitable. Other types name one or more persons as default beneficiaries, who may or may not be charitable trustees or entities. This avoids the invalidity problem but it creates other risks. I have argued that the default beneficiary may well have rights to information about the trust, and that suggestions to the contrary are difficult to justify. The beneficiary is necessary for the existence of the trust, and denying information to that beneficiary on the basis that it is somehow not a real beneficiary seems, at the least, rather inconsistent. The rule in Saunders v Vautier presents another risk, exacerbated by some uncertainty. If only beneficiaries are entitled to invoke the rule, then the default beneficiary, who may not be intended to benefit at all, could demand all of the property at the moment the trust is constituted. Even if objects of discretionary powers have standing to be considered in relation to the operation of the rule, the question is whether this standing applies only to a sub-set of such objects. If it does, then again the trust may be subject to termination contrary to the wishes of the settlor. Finally, massively discretionary trusts create certain risks inasmuch as the decision-making processes of the trustees become the final word—one might say the only word—as to who benefits from the trust. If trustees take too much direction from the settlor, there is a risk of a finding of sham or that the settlor is a de facto trustee. But even if they aim to decide independently, the terms of the trust give them precious little to go on. The wishes of the settlor take on a dominant role, so much so that the structure seems to be a kind of purpose trust. If it were found that the genuine intention of the settlor, shared by the trustees, was that the trustees should implement the wishes of the settlor (rather than act in what the trustees perceive to be the best wishes of the beneficiaries), then there is a serious risk of a finding of invalidity and hence of a resulting trust. This is a risk for both the ‘Red Cross’ variant and the ‘family’ variant of massively discretionary trusts. Even where trustees’ decisions control everything, English law continues to hold that trustees are not required to give reasons for their decisions, or to produce letters of wishes, at least in family trusts. I suggest there is a serious possibility that this principle is subject to revision in a higher court, or to not being followed in other jurisdictions, or both. Accountability is part of the irreducible core of trusteeship, and secrecy does not stand comfortably beside accountability. But however the rules on disclosure may evolve, it seems clear that a massively discretionary trust invites more litigation than a trust with constrained discretions, because in the former context, all the benefits that are derived from the trust come from the decisions made by others in the exercise of (usually fiduciary) powers. Those affected will at least want to know the reasons. I do not think that hiding that information from them will reduce the litigation risk. What all these risks have in common, in my view, is that massively discretionary trusts are a kind of deformation of the trust device. The common law trust is an enormously flexible institution. It does, however, have a certain logic to it. Trusts have features that are definitionally present, in the sense that if those features are not present, the structure is not a trust. Because, by definition in the common law, a trust is an obligation regarding the benefit of property that is owed to one or more beneficiaries, a trust needs a beneficiary. And because, by the same definition, the trust exists to benefit the beneficiary, the trustee is accountable to the beneficiary and must provide her with all relevant information about the trust.123 Those who create massively discretionary trusts seem to wish to create trusts that do not have one or both of these basic features. It is a deformation of the trust to create a structure in which there is no real beneficiary; and it is a deformation of the trust to create a device in which beneficiaries have no significant rights.124 They are, in the end, the same deformation. The evidence of this is the supreme importance of the letter of wishes. Of course, an express trust is an expression of the wishes of the settlor. But the central axis of the trust is the legal relationship between the trustees and the beneficiaries. To the extent that the wishes of the settlor become terms of the trust, they are built into that relationship.125 To the extent that they do not, they are not. A settlor who wants to create a structure in which his wishes are controlling, but are at the same time not legally binding, so that they can be variable and secret, has misunderstood the nature of the trust. As in many fields of the common law, there has been a gradual evolution, over long years, in styles of trust drafting. This kind of gradual evolution may make it more difficult for judges to notice when a line has been crossed, from what is acceptable to what is impossible. A common law trust with no beneficial interests is impossible. It is a violation of the beneficiary principle and a violation of the rule against non-charitable purpose trusts.126 A common law trust in which the trustees do not owe duties of accountability to the beneficiaries is also impossible. If you want people to hold property without being accountable to beneficiaries, then you do not want a trust. A trust in which the trustees are to be guided, not by the best interests of the beneficiaries but by the wishes of a person who is neither a beneficiary nor a trustee, is also impossible according to the common law. It is either a trust for that person, or a non-charitable purpose trust, and since the latter is impossible, it leads to a resulting trust. Massive discretions can sometimes be a smokescreen to try to make possible the impossible. Courts should be vigilant. Acknowledgement This paper was first given as a Current Legal Problems lecture at the Faculty of Laws, University College London, 21 May 2015, and then at the conference on Modern Studies in the Law of Trusts and Wealth Management, Singapore, 30–31 July 2015. It was published at (2017) 70 CLP 17 and also as ch 5 in RC Nolan, KFK Low and TH Wu (eds), Trusts and Modern Wealth Management (CUP 2018) 130. I thank the Editorial Board of Current Legal Problems for permission to reprint it here, with some minor updating and other changes; textbook citations have not been updated from the original version. Although we do not agree on some of the points in what follows, I thank Judge Paul Matthews, James Kessler QC and James Penner for helpful comments. I thank Alexandra Popovici for helping me, in conversations over many years, to better understand the relationship between one's control over assets and their availability to one's creditors. Lionel Smith studied law at the University of Western Ontario (LL.B.), Cambridge University (LL.M.), Oxford University (D.Phil., M.A.) and the Université de Montréal (LL.B.). He is Sir William C. Macdonald Professor of Law at the Faculty of Law, McGill University and Visiting Professor at the Faculty of Law, Oxford University. He is a Titular Member of the International Academy of Comparative Law. He is also a member of the American Law Institute, the European Law Institute, and the International Academy of Estate and Trust Law. He is a non-practising member of the Bar of Alberta. Email: [email protected] Footnotes *** Reprinted by permission of Oxford University Press on behalf of University College London, Faculty of Laws. 1. For examples, see Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4, 192 CLR 226 [9]–[25]; Clayton v Clayton [2016] NZSC 29, in which the terms of the trust are set out in the Appendix to the judgment; JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch) [106]–[142]. 2. Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd [2011] UKPC 17, [2012] 1 WLR 1721. The case is noted by L Smith (2013) 129 LQR 332. Although Cayman Islands trust law is different from English law, particularly in relation to the statutory STAR trust, there was no suggestion that the trusts in question were STAR trusts, and there was no reference in the judgment to any differences between English law and Cayman law. In any event, nothing turns on this for the points I wish to make. 3. ibid [4], [9]–[10]. The final sentence appears this way in two law reports, including the Weekly Law Reports. Lord Collins might have meant ‘a charity’, perhaps a particular charity named in the trust deed; we will return to this issue later on. 4. D Hayton, P Matthews and C Mitchell, Underhill and Hayton: Law Relating to Trusts and Trustees (19th edn, LexisNexis 2016) [1.1] (1): ‘A trust is an equitable fiduciary obligation, binding a person (called a trustee) to deal with property (called trust property) owned and controlled by him … for the benefit of persons (called beneficiaries …) … any one of whom may enforce the obligation.’ 5. This is also the sense that one author had in mind when he recently said that ‘discretionary trust’ is an oxymoron: J Nitikman, ‘Sham, Illusion and All That Jazz: A Case Comment on Clayton v Clayton’ (2016) 22 Trusts & Trustees 180, 180. What the author means is that an obligation cannot be non-obligatory. As I explain below, however, in the subsection ‘Discretionary trust’, there can be a discretionary trust even when ‘trust’ is used in the narrow sense. 6. Hence, in Re Baden’s Deed Trusts [1969] 2 Ch 388 (CA), the Court of Appeal held that cl 9(a) of the settlement created only a power, not a duty or a trust in the narrow sense. But it did not follow that there was no trust anywhere in the story: the settlement still created a trust. The conclusion on cl 9(a) was overruled by the House of Lords (McPhail v Doulton [1971] AC 424 (HL)). 7. Hence, some authors have expressed this question of construction as whether the provision in question creates a power or a duty: AH Oosterhoff, R Chambers and M McInnes, Oosterhoff on Trusts: Text, Commentary and Materials (8th edn, Carswell 2014) ch 3. This avoids confusion with the wide sense of ‘trust’ that refers not to a particular provision but to the whole structure. 8. Underhill and Hayton, (n 4) [8.146–8.156] argue that non-charitable purpose trusts should be possible in English law, even though this would be inconsistent with their own definition of ‘trust’ (the inconsistency is acknowledged at 8, fn2). This remains very much a minority view for the common law, and even in jurisdictions where non-charitable purpose trusts are permitted by legislation, they create theoretical problems since they involve assets that beneficially belong to no one: P Matthews, ‘From Obligation to Property, and Back Again? The Future of the Non-Charitable Purpose Trust’ in D Hayton (ed), Extending the Boundaries of Trusts and Similar Ring-Fenced Funds (Kluwer Law International 2002) 203; L Smith, ‘Give the People What They Want? The Onshoring of the Offshore’ (2018) 103 Iowa L Rev 2155. Why should a person be able to affect assets to some private purpose of his choice, while at the same time insulating those assets from his creditors? The generally accepted onshore common law position is that non-charitable purpose trusts cannot be created, at least outside of the so-called ‘anomalous exceptions’ (Underhill and Hayton (n 4) [8.163–8.174]), which are probably best regarded as powers. But even if this minority view were accepted, it would be based on the argument that there is a trust in the narrow sense: the trustee is obliged to apply the property to the purpose, with the enforcement of that obligation falling to a named ‘enforcer’. The traditional view is simply that such an arrangement does not include a genuine obligation, since neither the enforcer nor any other person has a direct interest in the performance of the obligation; see also K Low, ‘Non-Charitable Purpose Trusts: The Missing Right to Forego Enforcement’ in RC Nolan, KFK Low and TH Wu (eds), Trusts and Modern Wealth Management (CUP 2018) 486. A trustee’s obligation relating to the benefit of trust property has the effect that his own creditors have no access to that property; outside of the (public) case of charity, someone should (and so should his or her creditors). 9. With respect, this is why it was questionable for French CJ to suggest that it is possible to create a trust in which ‘there was no equitable interest in its assets held by anyone’: Kennon v Spry [2008] HCA 56, 238 CLR 366 [49]; although much depends on what he meant by an ‘equitable interest’. If an equitable interest is that which is held by a person who has a right (albeit possibly defeasible, and possibly only as a member of a group) to some of the trust property, then it is not possible. An attempt to do that leads (unless it creates a charitable trust) to an immediate resulting trust, so that the settlor holds an equitable interest. The only alternative is that the property is not held in trust: if you transfer property to someone and empower that person to dispose of it in certain ways, but do not oblige her to dispose of it in any particular way, you may find that it is hers beneficially (Re Harbison [1902] 1 Ir R 103 (MR)). French CJ referred to Commissioner of Stamp Duties (Queensland) v Livingston [1965] AC 694 (PC), but the crucial feature and central holding of that decision is that the estate of a deceased person is not a common law trust. See L Smith, ‘Scottish Trusts in the Common Law’ (2013) 17 Edinburgh L Rev 283. The analysis of Heydon J in Kennon [170]–[172] is preferable. 10. To be clear, in this section I am addressing the case of a power which the trustees (or others) can choose to exercise or not to exercise. I am not addressing the less common case in which the trustees are obliged to distribute some property among a class of beneficiaries, but have a choice as to which of them shall receive it. That situation is discussed in the next section. 11. The word ‘object’ also has wide and narrow senses. In a wide sense, it includes both beneficiaries in the strict sense, and those who are merely objects of powers. It might even include charitable purposes. This is the sense used when we say that every trust (and every power) must satisfy the relevant test of certainty of objects. The narrow sense contrasts objects (of non-obligatory powers) with beneficiaries in the strict sense. Generally in this article, I use the word ‘object’ in the narrow sense. 12. See n 3. 13. Kennon (n 9) [125] (Gummow and Hayne JJ). 14. Re Manisty’s Settlement [1974] Ch 17, 25. This summary of the law was based on leading cases such as Re Gulbenkian’s Settlement [1970] 1 AC 508 (HL) and McPhail (n 6). 15. Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587, 1617–18. 16. Richard Nolan has argued that objects of powers have standing to enforce trust administration: R Nolan, ‘Invoking the Administrative Jurisdiction: The Enforcement of Modern Trust Structures’ in PS Davies and J Penner (eds), Equity, Trusts and Commerce (Hart 2017) 151,160–68. The only case that he cites directly on point, however, is from Jersey. That decision relied on Schmidt v Rosewood Trust Ltd [2003] 2 AC 709 (PC) 714; I will argue below (in the section ‘Rights to information’) that the reasoning in Schmidt is doubtful, as is its authority in English law. Moreover, Jersey allows non-charitable purpose trusts, and so has abandoned the beneficiary principle; it systematically allows trusts to be enforced by non-beneficiaries. On the substance, Nolan argues (168) that because objects of powers have some rights ‘in relation’ to a trust fund (such as those identified in the extract above from Re Manisty’s Settlement (n 14)), therefore they have standing to enforce the trust. But this simply does not follow; having some rights does not give you more rights, nor a right to assert the rights of another (the beneficiary). Re Manisty’s Settlement says that the rights it identifies are the only rights of an object, and this seems to be inherent in the difference between being an object and being a trust beneficiary. 17. In McPhail (n 6), the House of Lords held that while a class of objects of a power can be extremely wide, a class of trust beneficiaries cannot be; it must not be ‘administratively unworkable’ ( 457). It would be impossible to make sense of this holding, which referred explicitly to the beneficiary principle, if objects of powers had the same enforcement rights as trust beneficiaries. 18. In the section ‘Rights to information’ we will examine the holding in Schmidt (n 16) that the court has a discretion as to whether objects of powers can demand information about the trust, and the suggestion in the same case that even trust beneficiaries do not have a right to such information. So far as I know, the courts have not suggested that they have a discretion as to who can enforce the proper administration of the trust property, although Nolan (n 16, 166–67) argues that this is the law, going so far as to suggest that trust beneficiaries may not always have rights of enforcement. It is unclear what theory of the trust underlies this approach; it seems to suppose that a trust is an institution of public law rather than one constituted of private, bilateral rights and obligations. In the Section ‘Rights to information’, I side with what I assume to be the traditional position, as stated by Millet LJ in Armitage v Nurse [1998] Ch 241 (CA) 253: ‘If the beneficiaries have no rights enforceable against the trustees there are no trusts.’ 19. The High Court of Australia has said of this sense of the term ‘discretionary trust’ that it ‘has no fixed meaning and is used to describe particular features of certain express trusts’: Chief Commissioner of Stamp Duties (n 1) [8]. 20. In McPhail (n 6), the House of Lords held that cl 9(a) of the deed created a discretionary trust in this narrow sense. The terminology of ‘discretionary trust’ was used in argument, along with the alternative label ‘trust power’ (which is another way of capturing the combination of obligation and discretion). Lord Wilberforce in his leading speech called it both a ‘trust power’ (eg 448–49, 452, 455–56) and a ‘discretionary trust’ (eg 451–54, 457). As is well known, the holding (by a majority of three to two) was that, for a discretionary trust in this narrow sense, the applicable test for certainty of objects is ‘individual ascertainability’, so that it is not necessary to be able to compile a complete list of the beneficiaries of such a trust in order for it to be valid. The dissenters may well have had the better of the argument: is it possible to owe a legal obligation, relating to the benefit of property, to all the members of an unascertained class of persons? 21. It was called a ‘true discretionary trust’ in argument in Schmidt (n 16): ‘… it imposes an obligation to distribute and one or more of the beneficiaries must therefore receive the entirety of the fund’. See also Mettoy Pension Trustees Ltd (n 15) 1614. The terminology is also adopted in Oosterhoff, Chambers and McInnes (n 7) 21. 22. For this reason, it is not easy to describe what interest each of them has individually. It is possible that this is the structure that French CJ had in mind in Kennon (n 9). 23. See n 3. 24. In the same way, if ‘discretionary trust’ is given this meaning using ‘trust’ in the narrow sense, the idea of a ‘non-exhaustive discretionary trust’ is a contradiction in terms. If distribution of the relevant property is not obligatory, the relevant provision does not create a trust but a power. 25. For this reason, when I refer to the ‘object of a power’, I mean an object of a power who is not a beneficiary in the strict sense. In other words, I do not mean to include the beneficiary of a discretionary trust in the McPhail sense. Such a person is a trust beneficiary, and is also in a sense the object of a power (of selection). 26. The costs of trust management do have priority, but unlike the debts of a deceased person, these costs would rarely amount to more than a small percentage of the trust fund. 27. This is the structure of the statutory power of advancement that appears in s 32 of the Trustee Act 1925, which is inserted by legislation into English trusts unless it is expressly excluded (s 69(2)). 28. In argument in Schmidt (n 16, 711) it was said that in most offshore trusts ‘…(iii) the persons intended to benefit are not true beneficiaries but mere objects of those discretionary powers; while (iv) the only beneficiary properly so called is a charitable institution (hence the generic designation “Red Cross trust”) having no connection with the settlor and never intended to benefit, except by default …’. 29. See, for example, the trust deed in Clayton (n 1), where the ‘final beneficiaries’ were the children of the settlor (cl 2.1). That trust also provided for other relations to be beneficiaries, should one or more of the children die before the trust came to an end (cls 10.1 (b), (c)). See also Pugachev (n 1) [124]. 30. The details depend on the drafting. If the trustees have a power of appointment, as that term is traditionally (but no longer always) used, it is a power to ‘appoint’ fixed interests which remain trust interests. This may create a bare trust, which may be ended when and if the beneficiary chooses. If the trustees have a power of advancement, they hold a power to transfer property out of the trust to the objects of the power (and the term ‘power of appointment’ is sometimes used to describe such a power). If such a power extends to all of the trust property, its exercise can lead to the end of the trust at any time, and such a power is typical in massively discretionary trusts. The label ‘advancement’ itself has multiple meanings: sometimes it refers to a power to give capital to a person who already has a capital interest, vested in interest but not in possession (see n 27). Sometimes it only means that the power allows the object to be ‘advanced’ and benefitted, regardless of whether he or she has a capital interest. See DWM Waters, M Gillen, and L Smith, Waters’ Law of Trusts in Canada (4th edn, Carswell 2012) 1190–93, 1199–200, and Kain v Hutton [2008] NZSC 61, [2008] 3 NZLR 589. Whether the use of the word ‘advancement’ restricts the reasons for which such a power can be used is largely a question of drafting. 31. Particularly in the offshore, such trusts may well have a ‘protector’, a person who holds (whether or not in a fiduciary capacity) some rights or powers of supervision or oversight. The presence of such a person does not address any of the concerns that I raise in this article, although it may exacerbate some of them. For an onshore example see Pugachev (n 1), in which it was held ([178]–[179], [182], [267], [278]) that the settlor’s non-fiduciary powers as a protector had the effect that he was the beneficial owner of all of the trust assets. 32. Vandervell v IRC [1967] 2 AC 291 (HL). 33. This seems to be implied by JK Kessler, Drafting Trusts and Will Trusts (12th edn, Thomson/Sweet & Maxwell 2014) [5.44]. Kessler recommends drafting trusts that are massively discretionary. His book now has a number of spin-off versions in other jurisdictions: see JK Kessler and F Hunter, Drafting Trusts and Will Trusts in Canada (3rd edn, LexisNexis 2011); JK Kessler and M Flynn, Drafting Trusts and Will Trusts in Australia (Thomson Lawbook Co 2008); JK Kessler and C Lee, Drafting Trusts and Will Trusts in Singapore (Sweet & Maxwell Asia 2007); JK Kessler and S Grattan, Drafting Trusts and Will Trusts in Northern Ireland (3rd edn, Bloomsbury Professional 2012); JK Kessler and T Pursall, Drafting Cayman Islands Trusts (Kluwer Law International 2006); JK Kessler, N Chand and T Pursall, Drafting British Virgin Islands Trusts (Sweet & Maxwell 2014). 34. One of Kessler’s proposed techniques for dealing with uncertain future events is to expand greatly the class of defined ‘beneficiaries’ (Kessler ibid [5.48]). But what his clause calls ‘beneficiaries’ are only objects of powers; it is only those named in what he calls the ‘default clause’ who are beneficiaries in the strict or technical sense. Even with a massive class of objects of powers, a genuine beneficiary—a beneficiary in the strict sense—is needed to satisfy the beneficiary principle. A genuine beneficiary is someone who is entitled (even if defeasibly) to the trust property or some of it. At [29.4] Kessler mentions the possibility of a trust that names no beneficiaries, and suggests that there is a risk that it would be declared a sham; but in fact such a trust cannot be created in the common law, unless it be valid as a purpose trust, which means that it must be exclusively charitable (n 8). The reverse point is illustrated by Clayton (n 1), where the ‘final beneficiaries’ were defined (by cl 2.1) to be the children of the settlor. The judges of the Supreme Court seemed to assume that this meant that the only (‘final’) beneficiaries were his two daughters: [10], [46], [93]. But any future child born to the settlor would also be a (‘final’) beneficiary (cl 2.1, ‘final beneficiaries’). More importantly, the question who is a beneficiary is not settled by the definition clause of the trust deed, but rather by the interests created; again, the beneficiaries in the strict sense are the people who will get the trust property if the discretions held by trustees or others are not exercised. This is why, in massively discretionary trusts, it is typically the default clause that identifies the beneficiaries. In Clayton (n 1), if one or more of the children had died when that clause came into operation, other persons (their issue, or ultimately the next of kin of the settlor) would take the property (cls 10.1 (b), (c)). Thus, there was a class of potential future beneficiaries in addition to the daughters, even though none of those potential beneficiaries were called ‘beneficiaries’ or ‘final beneficiaries’ in the trust deed. 35. In the ‘family’ version, the default beneficiaries may be or include the persons who are intended to benefit. Even here, however, like in the Red Cross version, it is probably intended that they will benefit only as objects of powers, via the trustees’ use of their dispositive discretions. 36. Morice v Bishop of Durham (1805) 10 Ves Jun 522, 32 ER 947 (LC) 541–42, 954–55; Chichester Diocesan Fund & Board of Finance Inc v Simpson [1944] AC 341; H Picarda, The Law and Practice Relating to Charities (4th edn, Bloomsbury Professional 2010) 326–27; W Henderson, J Fowles and J Smith, Tudor on Charities (10th edn, Sweet & Maxwell 2015) 300–03; Kessler (n 33) [25.6]. 37. Taken from an example in J Penner, The Law of Trusts (8th edn, OUP 2012) 53; cf Kessler (n 33) [29.4], who mentions the possibility of naming as default beneficiary ‘such charities as the trustees shall determine.’ In Chief Commissioner of Stamp Duties (n 1) [20], the trust deed before being amended provided that the ultimate beneficiaries were charities to be selected by the trustees, but only if the named default beneficiaries died without issue. This is a different case because the property is not held on charitable trusts from the moment of constitution; the obligation to so apply it would arise only if prior beneficial interests (some vested and some contingent) were extinguished. An object of a power does not have a beneficial interest. 38. Here I am using the term ‘trust’ in the narrow sense, of an obligation relating to the benefit of property. 39. Compare Re Barton [2002] EWHC 264, but note that the charity designated to take the capital was in the form of a legal person. On the other hand, the testator named particular charitable purposes. The case will be further discussed below. 40. See text at n 37. 41. Picarda (n 36) 326–27: ‘… if a gift or trust is to be upheld as charitable, the application of the funds to charitable purposes must be obligatory’. The power in favour of non-charitable objects obviously means that the application of the funds to charitable purposes is not obligatory. 42. See Re Sayer [1957] Ch 423, in which a discretionary trust (in the narrow sense) was held void (the result would be different after McPhail (n 6)), leading to a resulting trust, but the dispositive powers were valid. 43. Even if it obliges the original trustees to transfer the property to other trustees to pursue those purposes; compare T Choithram International SA v Lalibai Thakurdas Pagarani [2001] 1 WLR 1, [2001] All ER 492 (PC). 44. In charitable trusts, the validity of the trust turns on its being exclusively charitable. A charity in the form of a legal person is constituted as a legal person under statutory authority (or possibly by a royal charter), so its existence is not in question. Its obligation to use property it acquires for charitable purposes arises separately, from its constitution and (in English law) from the Charities Act 2011. 45. Following the death of the Duke of Westminster in 2016, The Guardian published a story entitled ‘Inheritance Tax: Why the New Duke of Westminster Will Not Pay Billions’ (11 August 2016, <www.theguardian.com> accessed 28 March 2019) , in which a financial advisor explained this effect in simple terms: ‘The benefits of trusts are that they don’t form part of somebody’s estate … In a discretionary trust, you have a whole pick list of potential beneficiaries which the trustees can choose to appoint benefits to. Because of that, you can’t point a finger to any potential beneficiary and say that’s your money. Money can stay in the trust and cascade down from generation to generation and nobody pays inheritance tax on it.’ The last assertion is not correct; as the story notes, ‘… trusts are subject to charges every 10 years from the anniversary of their creation. Known as the inheritance tax periodic charge, it can amount to 6% of the funds held.’ 46. For an example, see Clayton (n 1). The settlor was the former husband, who was also the sole trustee and one of the objects of the trustee’s discretions; he held, in his personal capacity, a power to add and delete persons as objects of the trustee’s powers; as trustee, he could dispose of all of the property to any of the objects, and he was authorized by the trust deed to exercise the powers that he held as trustee for his own benefit (cl 14.1) and to treat the objects (of which he was one) unequally (cl 11.1). Even so, he had no defined interest in the trust, and it was argued that as a result, it was not part of the ‘relationship property’ that had to be divided with his former wife. The holding was, however, that the range of powers and discretions that he held were themselves ‘relationship property’, whose value was assessed as the value of the trust fund. This was the inevitable result of a purposive interpretation of the governing family property legislation; cf Kennon (n 9); Grosse v Grosse 2015 SKCA 68, leave to appeal to SCC refused 2016 CanLII 7608. But even in the absence of such legislation, a power that one can use for one’s own benefit may itself be an asset available to one’s creditors, as shown in TMSF (n 2) and in Pugachev (n 1) [178]–[179], [182], [267], [278]. 47. (1841) Cr & Ph 240, 41 ER 482 (LC). 48. This variation was mentioned above, see text at n 29. 49. See the summary of part of Chief Commissioner of Stamp Duties (n 37). This structure does not attract the invalidity risk described in the previous section, even if the charities are not named corporate charities, because the property is not held on charitable trusts at the moment of constitution. The charitable trusts arise only upon the satisfaction of conditions precedent. 50. This is a desire which is expressly catered for in some offshore jurisdictions, most notably via the Cayman STAR trust: ‘[o]nly the enforcer can enforce the trust and beneficiaries, as such, have no standing to enforce the trust or obtain information in relation to the trust…’: GJR Stein, ‘Cayman STAR Trusts: Three Years On’ (2000) 7 Trusts & Trustees 28, 28. 51. See n 16. 52. ibid [1]. Note that Lord Walker here uses the word ‘beneficiaries’ to refer to objects of powers who are probably not beneficiaries in the strict sense (section ‘Terminology’, subsection ‘Beneficiaries’). 53. P Matthews, ‘The Black Hole Trust: Uses, Abuses and Possible Reforms’ [2002] Private Client Business 42, 110. Paul Matthews has also used the term ‘blind trust’: P Matthews, ‘In the Land of the Blind, the One-eyed Salesman is King’ (1998) 2 Jersey L Rev 143. In North America, at least, a ‘blind trust’ refers to a trust in which the beneficiary (often a politician) voluntarily gives up her right to know how the trust property is invested; this is a tool commonly used to deal with possible conflicts of interest. 54. These are the trusts against which The Economist spoke when it said (‘Mistrust the Trusts’, 9 November 2013): ‘A structure that was set up to protect the wives of medieval crusaders has ended up being used by the sort of business people who greet the Russian leader as “Vladimir”.’ For an object example, see Pugachev (n 1), where the description might have been applicable to both sides; it appears that no objection was taken, at least in this phase of the proceedings, to the ability of the successful plaintiff to have access to the British court system. The Economist called for the public registration of trusts and their beneficiaries (both actual and potential). 55. Underhill and Hayton (n 4) [56.24]. 56. See n 16 [54]. 57. L Ho, ‘Trustees’ Duties to Provide Information’ in E Bant and M Harding (eds), Exploring Private Law (CUP 2010) 343. 58. Armitage (n 18) 261. 59. Willers v Joyce [2016] UKSC 44 [12]: ‘… given that the JCPC is not a UK court at all, decisions of the JCPC cannot be binding on any judge of England and Wales, and, in particular, cannot override any decision of a court of England and Wales … which would otherwise represent a precedent which was binding on that judge’. This was a unanimous decision of a nine-judge panel. 60. J Mowbray and others, Lewin on Trusts (18th edn, Sweet & Maxwell 2008) [23–74]. 61. And this, whether or not the trust deed calls them ‘beneficiaries’: see n 34. 62. Sir Anthony Mason, ‘Discretionary Trusts and their Infirmities’ (2014) 20 Trusts & Trustees 1039, 1045. 63. See above, section ‘Terminology’, subsection ‘Discretionary trust’. 64. Mason (n 62) 1045. 65. Kennon (n 9) [170]–[172] (Heydon J). 66. eg EH Burn and J Cartwright, Cheshire and Burn’s Modern Law of Real Property (18th edn, OUP 2011) 527. 67. Re Mallinson Consolidated Trusts [1974] 1 WLR 1120, [1974] 2 All ER 530 (ChD). 68. [1981] AC 753. 69. ibid 780. 70. One reviewer noted that a person could create a trust for the children of X, even if X has no children at the moment of constitution. This is true, but it will (in the absence of other provisions) create a resulting trust at the moment of constitution, with the interest of the resulting beneficiary probably defeasible by the condition subsequent of the birth of a child of X. 71. If there are unnamed potential future beneficiaries, they do not have vested interests (see n 34 for examples). But such persons could not, on their own, satisfy the beneficiary principle; if there were only potential future beneficiaries, there would be an immediate resulting trust (see the previous note). I therefore disagree with the characterization of the interests of named default beneficiaries as ‘contingent’ in Chief Commissioner of Stamp Duties (n 1) [21]. As in Pearson (n 68), they were vested but defeasible. If this were not the case, the trust property would have been held on charitable trusts ([20]). The High Court characterized them as vested subject to defeasance only after the trust deed was amended to remove the possibility of defeasance by decease before the end of the trust ([25]); but both before and after that amendment, the interests were vested but defeasible by the exercise of dispositive discretions. 72. cf n 37. 73. With acknowledgement to Millett LJ in Armitage (n 18) 254: ‘…Willes J. famously observed that gross negligence is ordinary negligence with a vituperative epithet’. 74. See the section ‘Terminology’, subsection ‘Beneficiaries’. 75. They may owe them some limited obligations (see text at nn 14–15) but not the core obligation that makes a trust of property: the obligation to ensure that the benefit of that property accrues to another. 76. See n 18, 253. 77. In this sense, I fail to understand the approach of the Jersey judge who thought it was unnecessary to give notice to the Attorney-General of litigation involving a trust with three named charities as beneficiaries, on the ground that ‘in practice’ they would not receive anything: Re GEA Settlement (1992), reported at (1999) 13 Tolley’s Trust Law International 188, 189 and quoted in Matthews, ‘In the Land of the Blind’ (n 53). This seems to be assisting a settlor to misuse the law of trusts. 78. See n 47. For a careful analysis, see RB Cantlie, ‘A Case of Mistaken Identity: The Rule in Saunders v Vautier and Section 61 of the Trustee Act of Manitoba’ (1986) 15 Man LJ 135. 79. The rule does not apply in most states of the USA, nor in Alberta or Manitoba (subject to the analysis of Cantlie, ibid). It is not by accident that this rule features as prominently in this article as the beneficiary principle and the related principle that the common law does not allow non-charitable purpose trusts. One could argue that the rule in Saunders is only a consequence of the rule against non- charitable purpose trusts. Trusts for persons exist for the benefit of those persons, and once those persons, the beneficiaries, are fully capacitated they are not bound by what the settlor (who, by assumption, is not a beneficiary and so has no interest in the trust property) thinks is best for them. See J Langbein, ‘Mandatory Rules in the Law of Trusts’ (2004) 98 Northwestern U L Rev 1105; J Langbein, ‘Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power to Direct Investments’ (2010) 90 BU L Rev 375. The rejection of the rule in Saunders allows, in a sense, the creation of a non-charitable purpose trust, rather like a trust to burn the Rembrandt. See P Matthews, ‘The Comparative Importance of the Rule in Saunders v Vautier’ (2006) 122 LQR 266. 80. See n39. 81. See n4 [66.12]. 82. See n 60 [24–13]. 83. Morice v Bishop of Durham (1804) 9 Ves Jun 399, 32 ER 656 (MR), 405, 658, aff’d (n 36). 84. See section ‘Terminology’, subsection ‘Beneficiaries’. 85. See n4 [66.13]. 86. See n 20 [41]. 87. See text at n 29. 88. See, for example, the trust deed in Clayton (n 1). The default or ‘final’ beneficiaries were the children of the settlor, but that included future children (cl 2.1 ‘final beneficiaries); moreover, in the case that a child should die before the trust came to an end, the issue of that child would become beneficiaries (cl 10.1 (b)); and if all children and their issue failed, the beneficiaries would be the next of kin of the settlor (cl 10.1 (c)). The effect of this is that there was an unknowable class of possible future beneficiaries. Again, however, if Schmidt were taken to its logical conclusion, would beneficiaries be ignored for the purpose of Saunders when it is highly unlikely that they will benefit? In my view they should not be, and this again casts doubt on the reasoning in the case. 89. Most jurisdictions have legislation allowing the court to vary or revoke a trust where this is for the benefit of those who are not able to consent for themselves. It may be possible (for example, through the purchase of irrevocable insurance) to create an arrangement that terminates the trust in a way that ensures a benefit for any future beneficiaries who may come into existence: Waters' Law of Trusts in Canada (n 30) 1389–97. The trend of the case law is that the settlor’s intention is irrelevant on such an application, which is consistent with Saunders: ibid 1402–03; Goulding v James [1997] 2 All ER 239 (CA). 90. See section ‘Rights to information’. 91. See the text at n 52. 92. Re Manisty’s Settlement (n 14) 25: ‘The court cannot insist on any particular consideration being given by the trustees to the exercise of the power.’ 93. We have noted that it is not at all clear that the fiduciary obligations of a trustee are owed to objects of discretionary powers (text after n 15). If a trustee of a Red Cross trust were to acquire an unauthorized profit through the use of his office, would anyone but the charity have standing to sue for it? As noted earlier (n 30), such trusts typically feature a protector with the power to remove and appoint trustees; can this person be given the rights of a beneficiary to enforce the administration of the trust? As with granting enforcement rights to the objects of powers, enforcement by a protector would be directly inconsistent with the beneficiary principle and the concomitant rule against non-charitable purpose trusts. 94. Vatcher v Paull [1915] AC 372 (PC) 378; Klug v Klug [1918] 2 Ch 67, 71; McPhail v Doulton [1971] AC 424 (HL) 449, 457; Re Hay’s Settlement Trusts [1982] 1 WLR 202 (ChD) 209; Turner v Turner [1984] Ch 100 (ChD) 109–110; Re Beatty [1990] 1 WLR 1503 (ChD) 1506; Hayim v Citibank N.A. [1987] AC 730 (PC) 746; see also Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71, [15]. 95. Typically, the trustees cannot use the powers to benefit themselves. Even this restriction, however, is not always in place; see again the trust deed in Clayton (n 1), cl 14.1, and note also cl 11.1 which authorized the trustee to treat the beneficiaries and objects of powers (of which he was one) unequally. 96. It is possible that a letter of wishes is legally binding: Underhill and Hayton (n 4) [56.51] (‘an exceptional case’). The reason it is unusual is that such a letter is on an equal footing with the trust instrument, so there is no obvious reason to put it in a separate document. It would not be possible to amend it, except to the extent that the trust permitted this. Moreover, it would have to be disclosed to anyone who had the right to see the trust instrument. Disclosure of non-binding letters of wishes is discussed in the next section. 97. This was precisely the holding in Pugachev (n 1) [424], [434], [437], as an alternative to the holding that the defendant’s non-fiduciary powers as a protector made him the beneficial owner of all the trust assets (see n 31). 98. Pugachev, ibid and Underhill and Hayton (n 4) [4.6], discussing the case in which the trustee simply holds the trust property ‘to the order’ of the settlor. 99. The problem may be even more profound where the settlor is also the sole trustee, as in Clayton (n 1). The Court ([118]–[127]) left unresolved the issue whether the settlor had even successfully created a trust at all, since he could do whatever he wished with the property, including giving all of it to himself. 100. Dubai Aluminium Co v Salaam [2002] UKHL 48, [2003] 2 AC 366 [138]. A finding of sham requires a shared understanding between the settlor and the trustees Shalson v Russo [2004] EWHC 1637, [2005] Ch 281 [190]; Mowbray (n 60) [4-22]; but note the holding in Pugachev (n 1) [434], that this may be satisfied if the trustee ‘had no intention independent of’ the settlor); a finding of de facto trusteeship does not. Moreover, such a finding may well mean that the de jure trustees are in breach of trust. 101. Dubai Aluminium Co, ibid. 102. In Fundy Settlement v Canada [2012] 1 SCR 520, 2012 SCC 14, practical decision-making was in the hands of the beneficiaries, who were resident in Canada, not the trustees, who were resident in Barbados. It was held that the trusts were resident in Canada. Trusts do not have any residence at common law but when taxation is based on residence it may be necessary to assign a residence to a trust, and the Supreme Court of Canada held that this is done on the basis of where control lies. 103. The assumption in Kessler (n 33) [7.16] is that non-binding expressions of wishes can be changed at any time. 104. In Minwalla v Minwalla [2004] EWHC 2823 (Fam), [2005] 1 FLR 803 [48], two contemporaneous but inconsistent letters of wishes were produced. When the plaintiff wife succeeded and sought to enforce her English judgment in Jersey against the trustees there, a third letter of wishes emerged: CI Law Trustees v Minwalla [2005] JRC 099 [25]. 105. Breakspear v Ackland [2008] EWHC 220, [2009] Ch 32, which is discussed below. 106. (2010) FCA 280 [20]. Similar is Clayton (n 1) [113]: a sham is ‘… a document that does not evidence the true common intention of the parties’. See also Pugachev (n 1) [441]–[442] for a suggestion of a wider notion of sham as a document that is drafted to mislead others. 107. This is the suggestion in Matthews, ‘The Black Hole Trust’ (n 53). This could leave the dispositive discretions in place, but it makes the settlor the only beneficiary of the trust. See also Mowbray (n 60) [4-23] on the effect of a finding a sham. 108. See n 8. It is possible to create non-charitable purpose trusts in some jurisdictions, but even there it is a separate question whether the purpose of ‘doing what the settlor wishes from time to time’ would be a legally permissible one. In Quebec, for example, it is certainly possible to create non-charitable purpose trusts, and it is arguable that all trusts, even if they have beneficiaries, are purpose trusts (see Civil Code of Québec, arts 1260, 1266–73). But a trust for the purpose of complying with the settlor’s wishes would be invalid, as the purpose would be considered inconsistent with the intention to create a trust (Bank of Nova Scotia v Thibault 2004 SCC 29, [2004] 1 SCR 758 [41]; cf n 99). 109. On the requirement that the trustees be implicated in the sham, see n 100. No other conclusion seems possible if the trustees take the view that the settlor’s expressed wishes are controlling, rather than the trust instrument. In this regard, note the holding in Pugachev (n 1) [434], supporting the alternative finding of sham, that the trustee ‘had no intention independent of’ the settlor. 110. See n 20. 111. [1965] Ch 918 (CA). 112. See n 105. In this case, the court ordered the disclosure of a letter of wishes and records of orally expressed wishes of the settlor, but affirmed that in general, such disclosure would not be ordered. 113. In Breakspear, Briggs J adopted part of the reasoning of Danckwerts LJ in Re Londonderry (n 111, 936) to the effect that trustees have a confidential role to play and so their reasons should remain confidential. This is a conflation of two senses of the word. The primary sense of ‘confidential’ and ‘confidence’ is not about secrecy, but about trust; see M Lupoi, ‘“Trust and Confidence”’ (2009) 125 LQR 253, 255–61. ‘Con’ in this setting means ‘thoroughly’ and ‘fides’ means, roughly, ‘trust’. All trustees, and all fiduciaries, are in a relationship of confidence in this sense—with their beneficiaries, not with the settlor. The sense of ‘confidential’ as meaning ‘private’ or ‘secret’ is different, secondary, derivative, and later. 114. Breakspear (n 105) [54]. The judgment as a whole is focused on ‘family’ trusts (see [6]–[8]). Underhill and Hayton (n 4) [56.58] say that it is ‘by no means certain how far these principles apply to other kinds of trusts’. To the extent that the reasoning is based partly on the aim of preserving ‘family harmony’, this may make sense; but leaving aside the trustees’ personal wishes in the matter, it is not clear whether family harmony is better served by secrecy than openness. Furthermore, there have not traditionally been different rules of trust law for ‘family trusts’, apart perhaps from the now-outdated rules on ‘marriage consideration’. 115. See the cases in n 94, which presuppose that such scrutiny is normal. 116. The example of the life-threatening illness is not obviously relevant to the disclosure of a letter of wishes (as opposed to a particular decision trustees might be considering). And how often are trustee decisions based on life-threatening illnesses, as opposed to assessments of needs, maturity, desert, resources, and (again—the real issue, especially when a letter of wishes is in issue) the wishes of the settlor? Surely Briggs J did not mean to imply that it might be in the interests of a beneficiary to be kept ignorant of his or her own life-threatening illness? We could imagine that trustees become aware of the illness of one beneficiary or (more likely) object of a power, generating financial need, and could not tell this private information to others. But I am not arguing for a position that would require trustees to disclose everything, including information which is private or secret (confidential, in the sense of ‘confidential information’: n 113). I am arguing against a position that says that trustees need not give any reasons at all when they give away property that does not beneficially belong to them, nor disclose the letter of wishes that is probably the most crucial document in the whole trust structure. 117. An iron rule against disclosure would make it futile to seek disclosure without a claim based on improper conduct; but recall that in Breakspear itself, disclosure was ordered. See also Underhill and Hayton (n 4) [56.62] on beneficiaries’ application to the court for disclosure. Schmidt (n 16) suggested that disclosure is always under the control of the court and so discretionary. 118. In the section ‘Misleading appearances’. 119. Underhill and Hayton (n 4) [50.2]; this is subject to Schmidt (n 16), but my reservations on that have already been expressed in the Section ‘Rights to information’. 120. The settlor may have communicated the letter to the trustees intending that it remain secret (confidential, in the sense of ‘confidential information’: n 113). But the settlor is not at liberty, even in the trust deed, to override the accountability of trustees to the beneficiaries: Underhill and Hayton (n 4) [56.22]. Where the trust deed is meaningless without the letter of wishes, it is not obvious why the settlor should be able to restrict access to the letter. 121. See n 94. 122. As noted by Briggs J [30], in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 (CA), Kirby JA, dissenting, would have ordered disclosure of a letter of wishes, partly on the basis that ‘Australian society accepts a generally greater level of accountability than has, until now, been accepted by the law of England.’ 123. John Langbein has compared trusts to contracts, in pursuit of an argument that favours maximum flexibility of trust terms and prioritizes the settlor–trustee relationship over the trustee–beneficiary relationship (J Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale LJ 625). But Langbein accepts that this is only an analogy, because many features of trusts are mandatory. These include the rule that a trust must benefit the beneficiaries, regardless of idiosyncratic wishes of the settlor; it follows directly that trustees’ accountability to the beneficiaries is also mandatory: see the articles cited in n 79. 124. DWM Waters, ‘The Future of the Trust from a Worldwide Perspective’ in D Hayton (ed), The International Trust (3rd edn, Jordans 2011) 837. See also the comments of Young J in Gregory v Hudson (1998) 41 NSWLR 573 (SC), 586–87; aff’d (1998) 45 NSWLR 300 (CA). 125. Subject to the rule in Saunders (n 47), which ensures that the trust does not become a kind of non-charitable purpose trust (see n 79). 126. In some of the settings in which this article was presented, the observation was made that settlors who wished to create such arrangements could always take advantage of other legal systems that do permit them. Of course, this is true, but I never quite understood the point of the observation. If it was to say that money is mobile and people are generally free to move it, then it is difficult to disagree. If it was to argue that the common law should follow suit, whether by judicial development or by legislation, then on the contrary it is difficult to agree. Even a child is not permitted to argue that a course of conduct is acceptable merely because others are doing it. Arguments for law reform must go to the substance, and in this context must show why settlors should be able to launch assets into a plane in which no one seems to have any right to benefit from them, except the settlor whose settlement, and probably subsequent wishes, control the application of the assets, even while he is to be able to say that he has given them away when it comes to dealing with his own liabilities. For arguments against following the trend of offshore trust legislation, see Smith (n 8). © The Author 2019. Published by Oxford University Press on behalf of University College London, Faculty of Laws. All rights reserved. For permissions, please e-mail: [email protected]. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)

Millen, Paul, F;Cotorceanu,, Peter

doi: 10.1093/tandt/ttz014pmid: N/A

Abstract The professional plight of fiduciaries, lawyers, accountants, and other advisors who aid their clients in minimizing their tax burden rarely turns a dry eye wet. Even where the activities are legitimate under the law or sanctioned by the tax authority, many neutral minds (giddied in part by politicians and journalists) cannot shake the intuitive sense that the rich ought to pay more tax, even if they do not have to. The prevailing view is that where sufficient wealth couples with the will to avoid taxes, the financial intermediary finds a way. Accordingly, few hearts will tremble at the predicament confronting fiduciaries and tax advisors from the incoming intermediary common reporting standard avoidance disclosure rules. By detaching the interests of the intermediary from those of the client, however, this new regime will compel financial intermediaries to reassess their professional values. Backgrounds to the MDRs The background section to the Organization for Economic Cooperation and Development’s (OECD’s) Model Mandatory Disclosure Rules (MDRs) for Common Reporting Standard (CRS) Avoidance Arrangements and Opaque Offshore Structures could stretch back to the heady first days of The Foreign Account Tax Compliance Act (FATCA), the qualified intermediary regime or even further into the past. This article, however, is not a re-telling of the modern history of financial intermediaries and legal advisors. So, we begin at the obvious starting point: the introduction of the OECD’s CRS. In the wake of FATCA’s annihilation of bank and financial secrecy for US Persons, CRS promised to do the same, albeit in far greater volume. CRS obliges financial institutions (FIs) to divulge information on Financial Account Holders resident in Reportable Jurisdictions.1 Implemented under local law, CRS was not hindered by the allegations of extraterritoriality and US bullying that demonized FATCA. Persuaded by the premise that bank confidentiality could not be lifted for Americans with cross-border asset holdings and yet retained for the rest of humanity, many jurisdictions readily agreed to participate in the regime. Moreover, the majority acceded to the ‘first mover’ implementation timetable, launching the new CRS account holder due diligence procedures as of 1 January 2016. However, the few key jurisdictions that deferred or abstained proved crucial to CRS avoidance schemes. A few countries featuring major financial centres, including Hong Kong, Singapore, and Switzerland, postponed the onset of CRS for a year and the USA declined to join entirely. These exceptions ensured that plenty of the scrupulous but reluctant, not to mention the unscrupulous, had ample time to re-arrange their affairs in order to avoid reporting under CRS. The methods devised for non-reporting ranged across a wide spectrum, from what many considered to be legitimate to the highly dubious. Certain methods seem uncontentious. An example of what some (but by no means all) consider a legitimate CRS avoidance technique is moving one’s assets and perhaps structures to a jurisdiction that did not and will not enact CRS. Accordingly, some experts advised re-locating assets to the USA as one of the few non-CRS jurisdictions with a sophisticated financial infrastructure.2 Other methods of CRS reporting avoidance were, however, more unsavory. One favoured activity was to claim active non-financial entity (NFE) status for investment vehicles through various unnatural means such as serial dissolution and re-establishment of the same company or over-inflation of the value of intangible assets like goodwill. At its most egregious, taxpayers committed outright fraud by, for example, falsely claiming to be tax resident in a new country through Residency by Investment (RBI) or Citizenship by Investment (CBI) programmes.3 Then, the taxpayer concealed their real tax residence (ie where they live, work, and should pay income tax) from the FIs documenting them, thereby avoiding reporting.4 In short, CRS leaked. One clear retort to this leakiness is to query why the OECD did not include anti-abuse provisions in order to thwart such gamesmanship. Actually, they did, insisting that all jurisdictions implementing CRS under local law include common language reversing any transaction designed to dodge reporting under CRS.5 However, the provision was vague on essential elements, such as the identity of the enforcing jurisdiction and enforcing party to the transaction. As such, it has to our knowledge never been enforced anywhere by anyone. Moreover, the time lag between the announcement of a jurisdiction’s commitment to CRS and the passage of the local legislation containing the anti-abuse clause provided more time for unwilling participants to skirt the rules without fear of punishment. The brazen marketing of illegitimate CRS avoidance in certain regions did not go unnoticed though. The OECD, backed by the European Union (EU) and other countries with strong stakes in a robust cross-border account-reporting regime, reacted. The initial signs that CRS was not supposed to become a playground for tax advisors were swift responses to quash efforts by some jurisdictions to place the USA on their so-called white list of Participating Jurisdiction.6 Several jurisdictions, including the British Virgin Islands, Liechtenstein, and Luxembourg, proposed inclusion of the USA on their preliminary white lists, but quickly retreated under pressure from proponents of a vigorous CRS. These early efforts to plug existential holes in the regime were preludes to a determination on the part of the OECD and CRS supporters to keep off-shore financial centre jurisdictions from gutting their local CRS implementation. Evidence of this determination emerged from several directions. Foremost, a centralized campaign from the OECD and G20 featured frequently-asked questions (FAQs) to block certain self-serving interpretations and the like7 and the release of the CRS Implementation Handbook8 with an expansive section on trusts and other fiduciary structures (and virtually nothing new on any other subject). Moreover, the Global Forum on Transparency and Exchange of Information for Tax Purposes (a quasi-joint venture of the G20 and OECD) started to conduct and oversee peer reviews by examining the effectiveness of local CRS implementation in select jurisdictions.9 The OECD, in its role as the CRS central steering committee, was not alone in tightening the rules in order to ensure full and forthright compliance. Numerous jurisdictions amended their local regulations so that private wealth management structures could not CRS-proof structures for their beneficial owners (BOs) while eluding scrutiny. Illustrative examples include (but are far from limited to) the following: additional requirements for registration and nil reports by Trustee-documented Trusts, where typically only reporting FIs were so compelled; a growing demand for written CRS compliance programmes; and the addition of CRS compliance to the statutory audit portfolio, thus obliging all audited parties to adopt a full-throated compliance programme and standardizing interpretations of critical CRS provisions. The MDRs cometh For the OECD, however, such gradual constrictions on CRS avoidance were either too little or too late or both. Accordingly, the OECD set up the CRS public disclosure facility10 in order to amass data on the regime’s softer tissues for toughening them up via meta-regulations. The public disclosure facility marked the first concrete step towards financial intermediary disclosure requirements. The insertion of a fifth column within the financial intermediary industry was not novel. Already, Her Majesty’s Custom and Revenue (HMRC), the UK tax authority, had amended its Disclosure of Tax Avoidance Schemes (DOTAS) regulations in order compel the introducers or promoters of aggressive tax planning schemes to disclose information on such schemes to HMRC.11 Beyond the overall conceptual similarity, DOTAS deployed several regulatory tools subsequently adopted into the MDRs: disclosure at the time of implementation, the use of specified characteristics to identify suspect transactions, a deliberate over-inclusiveness for qualifying transactions, and a residual reporting duty for taxpayers in certain circumstances where the intermediary cannot report. With the MDRs, the OECD pushed these concepts even further. In December 2017, the OECD released the draft consultation version of the MDRs, followed swiftly by the final version on 9 March 2018 after a truncated consultation period. The MDRs embraced the same core concept as DOTAS: disclosure by intermediaries on aggressive tax planning schemes used by their clients. Each of these terms though was broadly construed. Unlike DOTAS, the scope of intermediaries subject to potential disclosure requirements expanded beyond introducers and promoters of the scheme to cover virtually anyone involved in the transaction, including advisors, fiduciaries, or bankers, if aware of the implications of the transaction.12 Unlike DOTAS, the MDRs do not have an intent element: a transaction need not satisfy the ‘principal purpose’ test, mandating that a tax advantage or CRS avoidance be the main reason for the transaction. Instead, the MDRs impose a strict liability standard that is purely result-oriented.13 Like DOTAS, the scheme need not even be adopted by a taxpayer; promoting a scheme and offering it for sale can trigger the disclosure requirement.14 Of course, the OECD is not a government, and the MDRs are thus a model for legislation that must be enacted into law before it can have any juridical effect. As the primary proponents of CRS, the EU unsurprisingly initiated the process of vesting the OECD model rules with legal force. On 25 May 2018, the EU launched the Directive 2011/16/EU (commonly and hereafter referred to as ‘DAC6’), a protocol to the existing tax information exchange regime in effect among its Member States.15 While the protocol itself lacks force, it is in a way self-executing as it instructs the Member States to enact conforming rules into local law in 2019 with first intra-EU reports exchanged in 2020 and provides them with the parameters of the necessary legislation. As such, it is highly likely that the regime in the EU Member States, once operational, will closely resemble the DAC6 text. For the most part, the language of DAC6 concerning CRS avoidance hews to the MDRs. Nonetheless, under close scrutiny, some differences emerge and the next section’s analysis of the MDRs will address the relevant divergences between the two regimes. How the MDRs work In sum, the MDRs mandate that for qualifying transactions or scenarios, designated parties must disclose specified information to the local competent authority for subsequent exchange on an automatic basis with other jurisdictions connected to the transaction. In order to determine who, if anyone, needs to submit a report, the MDR regime relies on three types of hooks: a transaction hook; an intermediary hook; and a jurisdictional hook. The transaction hook identifies transactions qualifying for disclosure by setting forth two general standards, further elaborated by sets of specific, non-exhaustive characteristics (known in MDR parlance as ‘hallmarks’). These are: CRS Avoidance Arrangements16: Any transaction ‘for which it is reasonable to conclude is designed to, marketed as or has the effect of’ the avoidance or manipulation of CRS reporting.17 ^ Specific hallmarks of CRS Avoidance Arrangements include the following: the use of financial investments that are not financial accounts; re-location of funds outside the scope of CRS reporting, such as: the transfer of assets to a non-reporting FI or to a jurisdiction that does not exchange CRS information with all relevant jurisdictions; the transfer of assets to a non-reportable financial account; the conversion of a reporting FI into a non-reporting FI or into an FI in a jurisdiction that does not exchange CRS information with all relevant jurisdictions; the exploitation of due diligence processes used to identify potentially reportable Persons and/or their jurisdictions of tax residence18; allowing or purporting to allow: an ineligible entity to qualify as an active NFE; an investment to be made through an entity without triggering a reporting obligation under CRS; or a person to avoid being treated as a controlling person (CP)19; or treating a payment includible in CRS reporting as not includible.20 Opaque Offshore Structures: a passive offshore vehicle21 held by means of an ownership structure: for which it is reasonable to conclude that it is designed to have, marketed as having, or has the effect of obscuring the identities of the BOs of the vehicle.22 ^ Specific hallmarks of Opaque Offshore Structures include the following: nominee shareholders with undisclosed nominators; means of control beyond formal ownership23; providing a BO access to a structure’s assets or income without recognition as the BO24; or the use of structures in a jurisdiction where the local anti-money laundering (AML) rules are weak.25 ^ an exception is provided for any entity: that is itself an Institutional Investor26 or that is wholly owned by one or more Institutional Investors or where all its BOs are resident for tax purposes solely in the local jurisdiction of the entity.27 The most notable aspects of the shared language in the definitions of the two types of reportable transactions are the objective standard (‘reasonable to conclude’28) and the absence of an intent element (‘has the effect of’). By draining the standard of subjectivity and motive, the OECD seeks to prevent affected parties from asserting defences based on personal viewpoint or state of mind. Once a transaction or scenario is classified as reportable, the MDRs specify the intermediaries to disclose information on it. The intermediary hook defines an intermediary (and thus a party with a primary disclosure duty) according to the following two categories: promoters: any person that ‘designs, markets, organizes or makes available for implementation or manages the implementation of’ a reportable transaction; service providers: any person ‘who provides aid, assistance or advice’ (referred to as ‘Relevant Services’) in connection with the design, marketing, implementation, or organization of a reportable transaction.29 The definition of a service provider is so expansive that it arguably captures activities remote from tax advisory services, such as a copying service companies, telecoms and internet companies, and notaries, if any contributed services used in the course of a reportable transaction.30 Accordingly, the MDRs provide service providers with an affirmative defence of ignorance: a service provider will not qualify as a service provider for purposes of the MDRs if, based on available information and relevant expertise, the service provider did not know or could not be reasonably expected to know that the transaction qualified as reportable. This defence must be established by the service provider with reference to all relevant facts and circumstances.31 Further limitations apply. Where professional privilege bars intermediaries from divulging information obtained from their clients, such intermediary is relieved of the disclosure duty (though they must then notify the relevant client(s) in writing of their reporting duty).32 Furthermore, where multiple parties qualify as intermediaries with respect to a single reportable transaction, only one party needs to report it. Thus, an in-scope intermediary need not submit a report if such intermediary has documentation that another intermediary party to the reportable transaction will do so.33 Having determined that a transaction is reportable and who, if anyone, incurs a primary reporting duty, the MDRs define which set of rules apply. The jurisdictional hook limits primary reporting duty to any intermediary who: makes that CRS Avoidance Arrangement or Opaque Offshore Structure available for implementation, or provides relevant services in respect of that CRS Avoidance Arrangement or Opaque Offshore Structure through a branch located in (the MDR-implementing jurisdiction); is resident or has its place of management in (the MDR-implementing jurisdiction); or is incorporated in or established under the laws of (the MDR-implementing jurisdiction).34 In cases where no intermediary is located in an MDR-implementing jurisdiction or any that is may not disclose the reportable transaction due to professional privilege constraints, a residual reporting duty attaches to the reportable taxpayer(s)35: they must report on their own transaction.36 However, a reportable taxpayer does not have to disclose information if doing so would violate a privilege against self-incrimination duly protected under local law.37 For any reportable transaction, an intermediary party to the transaction must file a report within 30 days of when the intermediary either makes the reportable transaction first available for implementation38 or supplies the services of a service provider in respect of the reportable transaction, whichever is earlier.39 In addition, there is a retroactive effect on promoters, but not service providers, of CRS Avoidance Arrangements entered into prior to the effective date of the rules, but after 29 October 2014. If the value or balance of the relevant financial account was equal to or greater than USD 1,000,000, then promoters are required to disclose these transactions within 6 months of the effective date of the MDRs in the relevant jurisdiction.40 This report must contain the following information (to the extent available or known to the reporting intermediary): The name, address, jurisdiction(s), and Taxpayer Identification Numbers (TINs) of tax residence41 of the following persons: the person making the disclosure; any client42 of that person in respect of the reportable transaction (separately identifying any client that is a reportable taxpayer, including the date of birth of such persons); any actual user of a CRS Avoidance Arrangement or BO of an Opaque Offshore Structure; any other intermediary with respect to that Arrangement or Structure; the details43 of that CRS Avoidance Arrangement or Opaque Offshore Structure including: in respect of a CRS Avoidance Arrangement, a factual description of those features of the arrangement which are designed to have, marketed as having, or have the effect of, circumventing CRS reporting; and in respect of an Opaque Offshore Structure, a factual description of those features that have the effect of not allowing the accurate determination of the reportable taxpayer’s BO status or creating the appearance that the reportable taxpayer is not a BO of the structure; and the jurisdiction or jurisdictions where the CRS Avoidance Arrangement or Opaque Offshore Structure has been made available for implementation.44 Although no jurisdiction has yet announced the logistics for MDR reporting,45 presumably they will piggyback off their existing CRS reporting infrastructure. If so, then the reports will be filed via the relevant local CRS reporting portal using Extensible Markup Language (XML)-formatted schemas. Hopefully, manual reporting methods will be made available for intermediaries submitting a small batch of reports. Punishment for non-compliance will be determined by each implementing jurisdiction. Likely, punishments include monetary penalties, scaled to reflect the intermediary type (ie promoter fines will exceed those of service providers) and the cause of non-compliance (ie fines for intentional non-compliance will exceed those for negligent non-compliance). The MDR commentary also proposes non-monetary penalties such as publication of non-compliant intermediaries (‘name and shame’) or extension of statutes of limitations for enforcement action against any underlying predicate activities.46 Simple enough, right? Illustrative scenarios Application of the MDRs can be simple in certain scenarios, but will be devilishly complex in others, several of which promise to become the future battlegrounds of MDR interpretation. This section will explore some of these scenarios. To do so, it will posit an original ‘zero scenario’ and then suggest a set of possible transactions, which must then be contrasted with the zero scenario in order to determine whether the transaction qualifies as a CRS Avoidance Arrangement. The zero scenario The zero scenario is as follows: the client, resident in Jurisdiction X, is the sole beneficiary of Trust Y; Trust Y holds USD 10 M in assets at Bank Y; the Tax Advisor (Tax Ad), resident in Jurisdiction Y, administers Trust Y in an individual capacity on behalf of the client; for CRS classification purposes, Bank Y is a reporting FI resident in Jurisdiction Y, and Trust Y is a passive NFE resident in Jurisdiction Y47; and Jurisdictions X and Y have a CRS reporting agreement in place, and both are MDR jurisdictions. View largeDownload slide View largeDownload slide The CRS documentation and reporting consequences of this set-up are as follows: as an FI, Bank Y must document Trust Y as an account holder; accordingly, Bank Y obtains a self-certification from Trust Y (via Tax Ad as trustee) on which Trust Y declares itself as a passive NFE; Bank Y must look through Trust Y as a passive NFE and request additional self-certifications concerning all CPs of Trust Y; the client and the Tax Ad qualify as Controlling Persons (CPs) of Trust Y and so provide such self-certifications to Bank Y (or the passive trust, through its trustee Tax Ad, provides the self-certification about the CPs); upon validating the CP self-certifications, Bank Y classifies the client as a reportable person (because she is resident in a reportable jurisdiction from the perspective of the jurisdiction of Bank Y) and the Tax Ad as not a reportable person (because he is local and jurisdictions are not reportable jurisdictions as to themselves per CRS); Trust Y is the account holder and has a reportable classification, but is likewise not a reportable person because it is in the same jurisdiction as Bank Y; and thus, on an annual basis, Bank Y will report information on the client to Jurisdiction Y’s authorities (for exchange with Jurisdiction X’s), specifically that the client is a CP of a passive NFE with a financial account with an account balance of USD 10 M. This is the set-up against which the subsequent illustrative transaction will be measured in order to determine whether they qualify as reportable under the MDRs as CRS Avoidance Arrangements. A separate analysis of the qualification of the resulting scenario as an Opaque Offshore Structure will be conducted in parallel, but that analysis is not contingent on this (or any other) zero scenario. Restructuring Transaction 1: Set up a corporate entity in Jurisdiction Z under Corporate Service Provider (CSP) and transfer USD 5 M to a new account with Bank Y. View largeDownload slide View largeDownload slide This is a classic triangulation scenario.48 By intermediating an underlying company (UC) between the reporting FI and the client, the client is no longer subject to CRS reporting so long as the UC is respected as an FI. Such is the case here and thus the CRS analysis is as follows: as an FI, Bank Y must document UC Z as an account holder; accordingly, Bank Y obtains a self-certification from UC Z on which UC Z declares itself as a professionally managed investment entity (PMIE)-type FI; Bank Y validates the self-certification and respects UC Z as an FI because Jurisdictions Y and Z have a CRS reporting agreement in place, and thus Z is a participating jurisdiction from the perspective of Jurisdiction Y49; Bank Y does not therefore look through UC Z or Trust Y in order to document the client as a CP; as an FI, UC Z must document Trust Y as an account holder and the client as the CP of the passive NFE account holder; accordingly, UC Z obtains a self-certification from the client as resident in Jurisdiction Y; UC Z validates the self-certification and treats the client as not a reportable person (because she is not resident in a reportable jurisdiction from the perspective of the jurisdiction of UC Z); the passive NFE trust is now reportable for purposes of CRS by UC Z because Jurisdiction Y, where the trust is resident, and Jurisdiction Z, where UC Z is resident, are CRS partner countries; however, the client is no longer reported for purposes of CRS; the CRS Avoidance Arrangement standard is met: it is ‘reasonable to conclude’ that the transaction ‘has the effect of’ circumventing CRS; and as a timely reminder: the motivation of the client in restructuring is immaterial. She might have a strong non-CRS reason for the restructuring or not even be aware of the CRS reporting consequences. Transaction 1, nonetheless, qualifies as a CRS Avoidance Arrangement. The transaction analysis does not end there. As noted above, the MDR report on Transaction 1 must also consider whether Transaction 1 qualifies as an Opaque Offshore Structure. That analysis is more straightforward, but ends in a cul-de-sac, as set forth below: indisputably, UC Z (as well as Trust Y) are passive offshore vehicles (as are the majority of private wealth management client structures); thus, its qualification as a reportable transaction under this standard pivots on the meaning of ‘opacity’; Transaction 1 does not satisfy any of the per se definitions of opacity (eg, deployment of a nominee shareholder), but may still qualify as reportable if located in a jurisdiction that abets the concealment of BOs through lax Anti-Money Laundering (AML) enforcement or other hallmarks of opacity; it is, however, not yet known who or who will define opacity.50 Possible approaches include OECD blacklists of opaque jurisdictions, locally-maintained blacklists or a set of criteria for assessing the opacity of specific structures. However, in the absence of a clear definition or a listing of bad jurisdictions, the analysis stalls here. One could imagine some FIs reporting all offshore jurisdictions, irrespective of the reputation of the location, or no offshore jurisdictions, equally irrespective of the reputation of the location; and thus, it cannot be determined whether Transaction 1 qualifies as an Opaque Offshore Structure. Asset diversification Transaction 2: Enter into a USD 1 M over-the-counter (OTC) derivative contract with investment banking division of Bank Y, paid for with money in the account of Trust Y. Transaction 3: Transfer 1 M to holding company for the purchase of real estate. View largeDownload slide View largeDownload slide Transaction 2 could be a paradigmatic example of the conversion of the form of the asset without a change in the economic benefits.51 To the extent that the security underlying the derivative contract matched the ones sold by the client to pay for the contract, the client’s economic position has barely budged. As the OTC contract is neither itself a financial account nor held in a financial account (and thus includible as part of that accounts reported balance or value), it is simply not reportable under CRS. Accordingly, the conversion of monies held in a reportable account into a non-reportable financial instrument is deemed to fall squarely within the parameters of a CRS Avoidance Arrangement and thus this transaction would be reportable. However, what if the client was embarking on an entirely new investment strategy dependent upon the greater flexibility afforded by derivative engineering? What if the assets sold to pay for the derivative contract were completely alien to the ones referenced by the contract? For purposes of the MDR CRS Avoidance Arrangements, the distinction makes no difference. It remains reportable as the degree of correlation between the reportable financial asset sold and non-reportable financial asset acquired is not considered, only the result is.52 As for the Opaque Offshore Structure analysis, for Transaction 2, it is blessedly brainless: no structure, no Opaque Offshore Structure. Presumably, for Transaction 3, the same principles apply to asset diversification by means of a real property acquisition as to OTC derivative contracts. It is not so. The MDRs provide a special carve out for real estate.53 The MDRs justify this special exemption by reference to the treatment of real estate holding under CRS. This is not facially unreasonable, but suffers a bit under scrutiny as it carries the whiff of bootstrapping. Yes, CRS accords special treatment to real estate holdings, but not to efforts to avoid CRS reporting through conversion of financial assets into real estate. By conflating the two concepts, arguably, anyone who avoided CRS reporting by shifting otherwise reportable assets into real property holdings gets a free pass. Moreover, none of the assorted rules seek to differentiate between real estate used as a residence, held as a passive investment or as part of the inventory of real estate developer. Rather, we fall back on the old adage: land is different. So, Transaction 3 enjoys MDR transactional immunity, right? Not so fast. One debate already emerging is whether the real estate exemption applies only to directly held real estate or to real estate held through a holding vehicle. The relevant exemption in the CRS Avoidance Arrangement section of the MDRs only extends to direct holdings. However, passages on Opaque Offshore Structure imply that, while real property holding vehicles cannot qualify as CRS Avoidance Arrangements, they may nonetheless qualify as Opaque Offshore Structures.54 Settlement of this debate may depend on local law and regulations or an on-point FAQ from the OECD. The Opaque Offshore Structure analysis for Transaction 3 is the same as that for Transaction 1. In the absence of any clear transgressions, like nominee shareholders, the determination of opacity is not yet clear. Accordingly, the qualification of Transaction 3 as a reportable Opaque Offshore Structure may vary depending on the jurisdiction of the FI making the determination or even such FI’s own perception of offshore structures. Asset relocation Transaction 4: Transfer 2.9 M to the US bank account of the client. Transaction 4 represents an existential risk to CRS. If a reputable financial system interconnected with the global one remains aloof from CRS, money will in theory gush out of the implementing jurisdictions and into non-implementing ones. Accordingly, the transfer out of a CRS jurisdiction into a non-CRS jurisdiction must qualify as a CRS Avoidance Arrangement in order to deter a torrent of outflows from CRS-compliant FIs. That is the case, except apparently, where it concerns the USA. Via another special allowance, the MDRs exempt transfers to the USA, while condemning transfers to any other jurisdictions where the taxpayer is no longer reported (which also covers CRS-implementing jurisdictions with no exchange agreements with the jurisdiction of tax residence of the taxpayer).55 To its credit, the MDRs posit a rationale for, and limitation on, this exemption: the reciprocity function of the FATCA Model 1 a intergovernmental agreements (IGAs) ensures that taxpayers fleeing CRS to the USA will still be reportable if resident in such an IGA jurisdiction. To the discredit of the MDRs, however, this rationale is bunk as the reciprocity provisions in the IGAs only apply in a limited set of circumstances.56 A more meaningful exemption would be limited to circumstances in which the reciprocally reported account information by the US Financial Institution (USFI) under FATCA is substantially similar to the account information reportable under CRS. However, the current language in the MDR Commentary may be construed leniently, such that any reporting on the US account or even the possibility of such reporting under an IGA will be grounds to invoke the exemption. We can expect this battleground to feature in the wars to come. As for the Opaque Offshore Structure analysis, for Transaction 4, it is the same as for Transaction 2: no structure, no Opaque Offshore Structure. Who reports the transactions? The primary reporting duty As discussed in the MDR overview section above, upon determination that a transaction qualifies as a reportable CRS Avoidance Arrangement, a reportable Opaque Offshore Structure, or both, several questions remain outstanding. Foremost among them is which parties to the transaction qualify as intermediaries for purposes of the MDRs. In addition to the illumination of several key points for the transaction-hook analysis, the scenarios above also supply us with some grist for the intermediary-hook analysis. For the illustrative transactions, the Tax Ad is highly likely to qualify as an intermediary. Even where the transaction was not the Tax Ad’s brain child and thus, the Tax Ad is not a promoter, the Tax Ad will meet the definition of a service provider where he contributes any ‘aid, assistance or advice’ to the transaction. As the trustee of Trust Y in the zero scenario, almost surely, the Tax Ad had to approve or at least execute each transaction. When coupled with a fiduciary’s duty of care, the defence of ignorance of the CRS consequences is likely unavailing. Thus, Tax Ad would need a terrific explanation in order to elude the intermediary label here. That makes sense though, as the Tax Ad is the intermediary party to the transaction with, in all likelihood, the highest degree of awareness around the transactions The Tax Ad is, thus, precisely the party that an intermediary disclosure regime ought to target.57 He may not be not alone though. Bank Y may also qualify as an intermediary for the transactions. The MDR Commentary asserts that mere execution of a bank transaction does not amount to the ‘aid, assistance or advice’ necessary to qualify as a service provider.58 Mere execution is, however, a low bar. By negative implication, any deeper involvement in setting up the transaction crosses over into service provider territory. As many clients of private banks expect advisory services from their banks, the front office staff may inadvertently trigger a reporting obligation by simply offering an opinion on the transaction to a taxpayer. Even if unrelated to the CRS or MDR implications of the transaction, such advice may qualify as related services. Furthermore, it may not matter if the bank employee has no awareness of the CRS implications of the transaction. Under an ‘enterprise knowledge’ standard, it is the bank’s awareness that matters, depriving the bank of an ignorance defence. Thus, Bank Y’s activities in respect of the illustrative transaction could easily turn it into an unwitting intermediary with reporting duties under the MDRs. One deeper question surfacing here is whether, if Investment Bank Y (IB Y) from Transaction 2 is in the same financial group as Bank Y, will Bank Y’s knowledge of the zero scenario be imputed to it? Furthermore, would such imputation depend on whether IB Y were a separate entity or a division in the same entity as Bank Y? What if there were no information sharing either by design (a so-called Chinese wall) or by neglect? Based on the tendency towards overinclusion observed so far, these subtleties are unlikely to matter. Finally, the CSP as corporate director of UC Z in Transaction 1 could also qualify as an intermediary. Any steps taken to set-up UC Z or process the transferred funds seemingly count as the type of concrete action that turns one into a service provider. Thus, to the extent the CSP were sufficiently knowledgeable of the zero scenario and thus the CRS consequences of Transaction 1, the ignorance defence would not be available. A similar question to the one for IB Y above emerges here: Whether a CSP, if in the same financial group as a trustee, will be imputed the trustee’s knowledge of a zero scenario. The resulting answer could have significant ramifications for the choice of jurisdictions for underlying companies. For a CSP though, the Opaque Offshore Structure is the likelier route to qualification as an intermediary because it will be familiar with the characteristics of the jurisdiction where it sets up the UC (though it may not agree with others’ assessment of those characteristics).59 The residual reporting duty As discussed in the MDR overview section above, jurisdictional, duplication, and professional privilege considerations may relieve any or all qualifying intermediaries from the MDR reporting responsibility, as follows: jurisdictional considerations: if the intermediary does not have the specified nexus with an MDR-implementing jurisdiction set forth above, it is not obligated to report; duplication considerations: if another intermediary party to the transaction will conduct the reporting, the other intermediaries are freed from the duty (so long as they can evidence that another intermediary submitted the necessary report); and professional privilege considerations: where lawyer–client, and only lawyer–client, privilege under local law bars an intermediary from divulging information about a client, the intermediary need not report, though it will need to notify the client of the need to report and the attendant circumstances (see below). Moreover, due to one or a combination of jurisdictional and professional privilege considerations, no intermediary party to a reportable transaction may be subject to a reporting duty even though the transaction qualifies as reportable. For example, consider the following hypothetical: a French resident individual; holds financial assets in a Swiss bank account; through a Swiss trust (defined as a trust administered by a Swiss trustee per CRS); and is advised by a Swiss tax advisor. What happens if on 31 December 2018 all the assets were transferred to a directly held account in a jurisdiction with no exchange agreement with France? Presumably, it qualifies as a CRS Avoidance Arrangement and thus would be reportable. However, the MDRs were not in force in Switzerland in 2018 and thus none of the intermediaries listed above is subject to MDR reporting. Pursuant to DAC6 though, the French MDRs must be retroactive to 25 June 2018. As a reportable taxpayer on a reportable transaction for which no intermediary will report, the French taxpayer must assume the reporting responsibility. This residual reporting responsibility will cause no end of problems. Of initial concern, few taxpayers will even be aware of the responsibility and may be only dimly aware of the MDRs or even of CRS. Intermediaries could proactively notify clients of their reporting responsibility in such situations, but such a client service may backfire. Following such notice, the taxpayer must still determine how and what to report. As anyone with even passing familiarity with FATCA and CRS reporting knows, submitting a report is onerous. Most portals oblige the submitting party to register in advance, which may require submission of identification and authorization documentation. Above all, the requirement to submit using an XML schema (though many CRS portals permit simplified manual reporting for small batches) will be a novel hassle for the taxpayer at a minimum and perhaps beyond the wherewithal of some. Unfortunately, the intermediaries in non-MDR jurisdictions can provide no further help unless the jurisdiction of the taxpayer permits foreign intermediaries to report on behalf of local taxpayers (which to our knowledge is not yet under consideration). Therefore, the supposed customer service provided by an intermediary notifying a taxpayer of the need to submit an MDR report is of minimal benefit.60 Conversely, as MDR-implementing jurisdictions realize the obstacles to residual reporting by their taxpayers, some may seek to alleviate it by excusing taxpayers with no actual knowledge of the duty, in which case a little knowledge might be an unpleasant thing. Quo Vadis, oh fiduciaries? For certain subsets of fiduciaries, the MDRs pose no dilemmas. Those who willingly abet tax evasion by their clients will ignore the disclosure rules as blithely as the other laws they flouted. Any fines imposed will be chalked up to the costs of doing business. For different reasons, those fiduciaries who service clients in bulk and rarely offer personalized services will duly comply. They will, however, be inclined to minimize the operational expense of MDR reporting without too much regard for the client cost. In between those two extremes stand the more conventional fiduciaries, who obey the applicable law, but within its parameters seek the licit advantages available for their clients. Nonetheless, in our experience, many such advisors regard the relationship with their clients as elevated by a sense of professional duty to protect their interests. Twinning these two impulses, these fiduciaries comply in full with any lawful requests for non-privileged information, but otherwise zealously safeguard the confidentiality of their clients’ personal and financial information. Additionally, their own professional dilemmas may well be exacerbated by pleas, threats, or inducements from potentially affected clients. These clients may promise indemnification or increased fees in an implicit trade-off, for intermediaries not to report their transactions. As such, the MDRs present fiduciaries with a professional quandary: whose interest do they truly serve—their clients or their own? In such circumstances, fiduciaries will have every incentive to justify minimal MDR compliance by construing each of the reportability hooks as narrowly—and each exception as broadly—as possible. The rationales for such grudging compliance will flow freely from even the most law-abiding fiduciary: the over-inclusiveness of the reportable transactions, notably the absence of an intent component, means that even ‘clean’ transactions are subject to reporting. The result is the divulgence of client information that the fiduciary knows to be not germane to substantive crimes like tax evasion, money laundering, or even CRS avoidance; certain language in the MDRs suggests that such clean transactions may not in fact be reportable ‘provided that it is reasonable to conclude that such non-reporting does not undermine the policy intent of such CRS Legislation’61; the scope of reportable transactions and intermediaries is so broad, plus the residual reporting by reportable taxpayers so novel, that many affected parties will inadvertently fail to comply, resulting in a regime more honoured in the breach than in the observance; disclosure of every single well-intended transaction will yield an avalanche of reports of inconsequential value, thus generating white noise though excess data and complicating the authorities’ searches for the ill-intended ones; disclosure of financial information may risk the welfare of clients from certain jurisdictions; and conflict with local data protection rules,62 which remain uncoordinated with the MDRs, is foreseeable, thus exposing intermediaries to the simultaneous risk of penalties for reporting confidential client information and for not reporting it. The OECD or local authorities could improve the situation and enhance compliance by instituting a more tailored set of rules designed to identify transactions that were CRS Avoidance Arrangements, in fact and purpose, not just in outcome. Rather than dismiss the complaints of fiduciaries as the grousing of the freshly regulated or the feigned outrage of the guilty, the OECD and supporting jurisdictions may wish to reflect on their own role in devising and implementing CRS. Within a few years of drafting and implementing a law on account reporting, they had to create a meta-law in order to close the loopholes in the first. Are we to anticipate MDRs for the MDRs around 2020 then? Paul Foster Millen (JD, LLM), the founder of Millen Tax & Legal GmbH, advises fiduciaries, Single Family Offices (SFOs) and Swiss banks and other financial institutions on an array of international tax topics. He specializes in OECD CRS and MDR compliance, FATCA, and the qualified intermediary regime and cross-border income flows from US assets. E-mail: [email protected]. Peter A. Cotorceanu is a US tax lawyer, a New Zealand barrister and solicitor, and a former US law professor. He is Founder and CEO of G&TCA (GATCA & Trusts Compliance Associates LLC) and Of Counsel to Anaford AG, a Zurich-based law firm. Mr Cotorceanu was previously the Head of Product Management for Trusts and Foundations for UBS in Zurich, where he was responsible for UBS’s FATCA compliance for trusts, foundations, and other fiduciary structures. Mr Cotorceanu has written and spoken extensively on FATCA and CRS compliance for the fiduciary industry. E-mail: [email protected]. Footnotes 1. A Reportable Jurisdiction is a jurisdiction with which the jurisdiction of the FI entered into an information exchange agreement pursuant to which the FI’s local authorities will share reported information with that country. 2. See Peter A Cotorceanu, ‘Hiding in Plain Sight: How Non-US Persons Can Legally Avoid Reporting Under Both FATCA and GATCA’ (2015) Trusts & Trustees.[AQ] 3. This is not to denigrate either RBI or CBI programmes. However, if individuals are going to take advantage of those programmes, they must not continue to actually live and work in their true home countries while hiding that fact from the FIs where they have accounts. 4. Sellers of such sovereign indulgences are presently under pressure to curtail the activity, and in October 2018, the OECD issued reports urging FIs to request additional information from suspected RBI/CBI beneficiaries (https://bit.ly/2z0lBzJ). 5. CRA Standard, Section IX.A.1. 6. The white list permitted implementing jurisdictions to temporarily designate other jurisdictions as Partner Jurisdictions, even if they had not yet entered into a CRS exchange agreement (for articulation of the significance of Partner Jurisdiction status, please refer to the ‘Illustrative scenarios’ section). 7. The FAQs address a wide range of topics, including thwarting avoidance schemes by, eg, limiting the use of excluded accounts and non-reportable payments. The FAQs are available at <https://bit.ly/2SOfxpZ> accessed 5 March 2019. 8. Second edition available at <https://bit.ly/2lgXd5s> accessed 5 March 2019. 9. The ratings from the Global Forum peer reviews are available at <https://bit.ly/1kgbo9h> accessed 5 March 2019. 10. A portal for anonymous reporting of schemes to circumvent CRS <https://bit.ly/2GEspIO> accessed 5 March 2019. 11. DOTAS guidance available at <https://bit.ly/2vCAVUZ> accessed 10 February 2019. 12. OECD MDRs, 16, Rule 1.3. 13. ibid. 14. See eg MDR Commentary, 37, para 63. 15. Please note that, in addition to the MDR-based provision, DAC6 also sets out numerous Base Erosion and Profit Shifting (BEPS) Action item 12 transfer pricing topics, which are beyond the scope of this article. 16. The MDRs defines ‘Arrangements’ as ‘an agreement, scheme, plan or understanding, whether or not legally enforceable, and includes all the steps and transactions that bring it into effect’ (OECD MDRs, Rule 1.4a) 17. 17. OECD MDRs, 14–15, Rule 1.1; according to the MDR commentary, transactions that result in the reporting of inaccurate or incomplete information qualify as well as those that result in non-reporting (24, para 3). 18. The RBI/CBI abuses set out above fall under this hallmark. 19. This sub-hallmark captures a conversion from a trust to a corporate entity in order to avoid reporting of the trust’s discretionary beneficiaries (MDR Commentary, 28, para 20). 20. This hallmark captures payments from a trust on behalf of beneficiaries (eg rent, tuition costs), that are not being reported as indirect distributions to the beneficiary (MDR Commentary, 29, para 21). 21. The MDRS define a passive offshore vehicle as any entity that: does not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises in the jurisdiction where it is established or is tax resident (OECD MDRs, 15, Rule 1.2, ) and that is resident in a jurisdiction other than the one of any one of its owners at the time of establishment (MDR Commentary, 30–31, paras 29–30). 22. OECD MDRs, 15–16, Rule 1.2. 23. This hallmark captures trustees who obey directions from parties not named in the trust deed (MDR Commentary, 32, para 26). 24. This hallmark captures interest-free loans, which are used with some frequency in the offshore fiduciary industry (MDR Commentary, 32, para 38). 25. As determined under the 2012 Financial Action Task Force recommendations (MDR Commentary, 33, para 39). 26. An Institutional Investor is a defined term in the MDRs (see OECD MDR, 17, Rule 1.4(f)). 27. OECD MDRs, 15, Rule 1.2 (though framed as an exception, it rather seems to disqualify the structure as off-shore and thus not to satisfy the eligibility criteria in the first place). 28. [This] test will be satisfied where a reasonable person in the position of a professional adviser with a full understanding of the terms and consequences of the Arrangement and the circumstances in which it is designed, marketed and used, would come to this conclusion.” (MDR Commentary, 25, para 6). 29. OECD MDRs (n 12). 30. MDR Commentary, 33, para 44; 34, para 51. 31. OECD MDRs (n 12); MDR Commentary, 34, para 51. 32. OECD MDRs, 20, Rule 2.4. This latter requirement is troublesome, especially where the advisor and the end client are in different jurisdictions. The advisor may not know whether the end client’s country has adopted the MDRs and, if it has, what the requirements of the MDRs as enacted are. And even if the advisor knows all of the foregoing, he or she would arguably be practicing law without a license by advising a client of the client’s disclosure obligations under the client’s country’s laws, which are the only laws that bind the client. 33. OECD MDRs, 21, Rule 2.5. 34. OECD MDRs, 19, Rule 2.1; DAC6 adds a fourth element to the jurisdictional hook: Entities: registered with a professional association related to legal, taxation, or consultancy services in an EU [Member State] (EU DAC6, para 21). 35. A reportable taxpayer is any end user of or beneficiary from a CRS avoidance arrangement or BO whose identity is concealed by means of an Opaque Offshore Structure (OECD MDRs, 18, Rule 1.4(l)); Referred to a ‘Relevant Taxpayer’ under DAC6 (EU DAC 6, art 1 1(b)(22)) and they must report the reportable transaction on annual basis so long as it is still in effect (EU DAC 6, para 11). 36. OECD MDRs, 21, Rule 2.6. 37. This self-incrimination ‘out’ arguably eviscerates unscrupulous taxpayers’ duty to self-disclose. After all, taxpayers who evade taxes are subject to criminal prosecution in most countries. Therefore, if a tax evader’s country grants a right against self-incrimination, a taxpayer who avoided CRS reporting to hide his or her tax evasion would presumably not have to disclose his or her incriminating CRS avoidance scheme. 38. A scheme is first available for implementation when the material design elements are complete and communicated to a client (MDR Commentary, 37, para 63); DAC6 sets the clock ticking for promoters at the earliest of the date (i) a scheme is ready for implementation, or implemented, or (ii) the first concrete steps towards implementation are taken. 39. OECD MDRs, 18, Rule 2.2; timing may be contoured to match local infrastructure, such as pre-existing disclosure regimes (MDR Commentary, 37, para 64). 40. OECD MDRs, 18, Rule 2.2. 41. DAC6 requires place of birth (for individuals) and a list of associated enterprises of the Relevant Taxpayer(s) as well (EU DAC6, para 14). 42. The definition of client is very broad, encompassing anyone ‘who requests an intermediary to, or on whose behalf, or for whose benefit, an intermediary make(s) a CRS Avoidance Arrangement or Opaque Offshore Structure available, or provide(s) Relevant Services in respect of such an Arrangement or Structure’. The term Client includes users or potential users and persons acting as a representative or agent of a Reportable Taxpayer. The term Client also includes persons who obtain assistance or advice from an intermediary on the design, marketing, implementation, or organization of a CRS Avoidance Arrangement or Opaque Offshore Structure with the intention of subsequently promoting that Arrangement or Structure to third parties' (MDR Commentary, 38, para 68). 43. DAC6 specifies a few more descriptive items such as the date of the first steps of implementation, the value of the reportable transaction, and the local law provisions that form the basis of it (EU DAC6, para 14). 44. DAC6 obliges the report to also identify any persons and other EU Member States likely to be affected by the reportable transaction (EU DAC6, para 14). 45. The preamble to the DAC6 refers to the EU‘s common communications network as the centerpiece for MDR information exchange (EU DAC6, preamble at para 14). 46. MDR Commentary, 43–44, paras 93–96. 47. Hypertechnically, an NFE trust is not resident in any jurisdiction under CRS unless it has its own independent tax residence, but the prerequisite test for FI status is nonetheless determined by residence of the trustee, which in this case is Jurisdiction Y. 48. MDR Commentary, 26, para 10ss . 49. Alternatively, PMIE-type FIs are treated as passive NFEs if resident in a non-Partner Jurisdiction from the perspective of the Reporting FI. 50. The DAC6 cites to publication EU 2015/849, but that too lacks an objective, bright-line standard for opacity, vesting discretion in FIs to determine when a BO is—or is not—identifiable (EU DAC6, Annex IV, Part II.D.2(c)). 51. MDR Commentary, 26, para 9. 52. In light of the tribulations encountered by the IRS in developing the s 871(m) regulations, due in part to the challenge of identifying which derivative contracts are sufficiently correlative to an underlying equity, perhaps we should be grateful if the OECD abandons any subtleties on this point. 53. MDR Commentary, 25, para 5. 54. ibid 30, para 26. 55. ibid (n 53). 56. Compare art 2.2(a) of the template Reciprocal Model 1A IGA (setting out the reporting on US Persons by non-US FIs) with art 2.2(b) (setting out the reporting on non-US Persons by US FIs). Treatment of indirect account holders (ie, assets held through entities) and the types of reportable payments are two glaring examples of the limits of the reciprocity at play. 57. The Tax AD is also the party likeliest eligible to invoke the professional privilege exemption from reporting. 58. Some banks are weighing a more prominent role in this process by alerting their account holder where any given transaction may be reportable and the general grounds for it. However, such heightened customer service may be counter-productive as it deprives the taxpayer of any hope of plausible deniability (see section on residual reporting). 59. MDR Commentary (n 30); 35, para 56. 60. Excluding a privilege situation where the intermediary must notify the client or where a fiduciary determines that the duty of care owed the client requires such full notification. 61. OECD MDRs, 15, Rule 1.1; see also MDR Commentary, 25, para 5. 62. For a rather cursory acknowledgement of this quandary, see the preamble to the EU DAC6 (para 17). © The Author(s) (2019). Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)

Davenport,, Kate;Nedeljkov,, Jovana

doi: 10.1093/tandt/ttz019pmid: N/A

Abstract The Court’s power to remove trustees who have misconducted themselves in trust administration or committed a clear breach of trust is well established. In comparison, the Court’s power to assist or replace deadlocked trustees is less well understood. This article will outline the different ways the Court can resolve trustee deadlock and the factors the Court will consider in deciding whether to intervene in trust affairs. It will conclude that the Court has a broad equitable jurisdiction to supervise trusts and properly interpreted, this jurisdiction allows them to intervene in trust affairs by making a decision on behalf of deadlocked trustees or removing trustees in a position of deadlock. Trustees must ensure they keep the welfare of the beneficiaries at the forefront of their minds in trust decision-making and should not shy away from seeking the Court’s assistance when faced with a deadlock that impedes trust administration. Introduction Being a trustee comes with its own unique challenges. Trustees increasingly have to deal with unruly beneficiaries and aggrieved third parties in exercising their equitable stewardship. These issues are compounded when co-trustees disagree over the interpretation of the trust deed or how to best exercise a discretion granted to them under the trust deed. Trustee disagreement, or deadlock, can arise in the context of ongoing management of the trust fund, or where trustees need to make a momentous decision (eg, how trust assets should be distributed or sold). Historically, the English Courts developed their equitable jurisdiction in supervising trusts to allow trustees to seek advice from the court to assist in situations of deadlock to ensure prompt and proper trust administration. This equitable jurisdiction has been carried over to other Commonwealth countries, and there is often a complementary statutory jurisdiction. Accordingly, it is well settled that trustees can seek the court’s advice or opinion as to the exercise of their discretion in making a trust decision. An application for advice can be made under either the court’s equitable or statutory jurisdiction but is commonly made under a streamlined statutory procedure. In making an application for directions/advice, trustees can choose to either surrender their discretion to the court (ie, the court will make a decision for the trustees) or seek the court’s approval of the trustees’ proposed exercise of their discretion (ie, retain their discretion). Where the court’s advice is unavailable, or the relationship between the trustees is affecting the future management of the trust, the court can replace or remove hostile trustees on application by a beneficiary or co-trustee. This article will examine a trustee’s right to seek the court’s directions/advice regarding the exercise of their discretion, the limits on a trustee’s right to surrender their discretion to the court and the court’s ability to replace/remove trustees who are deadlocked. It will focus on the English, New Zealand, and Australian jurisdictions, as their courts largely adopt the same approach to all three issues. Advice/directions When trustees find themselves in a situation of deadlock, unable to agree on how best to exercise their equitable discretion, they have the right to apply to the court for directions/advice in England, New Zealand, and Australia.1 This jurisdiction, once founded in the court’s equitable supervisory jurisdiction of trusts, is now enacted in statute across all three Commonwealth jurisdictions surveyed in this article. The procedure applicable to statutory applications is generally the same across all three countries: the trustees file an application for directions; evidence is given by way of affidavit; and the court has the power to direct affected persons to be served (such as beneficiaries). One issue that arises out of the parallel equitable/statutory jurisdictions is the limitation of the statutory jurisdiction, namely, whether it can be used to resolve matters of substantial importance. Another grey area is whether it is ever appropriate for trustees to surrender their discretion to the court in making an application for directions. These issues are explored in more depth below. Minor importance or substantive matters Historically, New Zealand and Australian courts interpreted their statutory jurisdiction to give private advice to trustees in a limited way. Applications for advice could only be made on points of minor importance. Questions of substance or importance involving controversy or contest between trustees were held not to lend themselves to applications for advice under trust legislation.2 The New Zealand position was in part based on Australian authority that it was not for the court to determine matters of basic controversy between trustees.3 However, it is clear that the equitable jurisdiction to give directions/advice (which the statutory jurisdiction is based on) never articulated any such limitations to the court’s supervisory jurisdiction over trusts. As early as 1805, the Chancery Courts emphasized the execution of a trust ‘shall be under the control of the court’ and ‘the Court can direct or compel due administration’.4 The New Zealand position has now changed, as confirmed in the recent judgment of the New Zealand Court of Appeal in Chambers v SR Hamilton Corporate Trustee Ltd.5 In Chambers, the court clarified that the statutory jurisdiction to give advice was not limited to applications in respect of minor or procedural trust issues.6 In doing so, the court followed the earlier approach of Kós J in New Zealand Māori Council v Foulkes, where his Honour made the following points in relation to the statutory jurisdiction7: the statutory provision was simply an enactment of a broad equitable jurisdiction that had long resided in the Chancery Courts; the provision could be used to resolve any live question of interpretation of a trust deed as well as any uncertainty as to the exercise of a power. It was a ‘robust, parallel’ source of jurisdiction that could be used to resolve ‘any substantial question of law concerning the meaning or administration of a trust’; not confined to matters of minor importance; the fact the parties are in dispute (or are adversarial) is not fatal to the exercise of the jurisdiction. The court’s function is not purely advisory or be invoked to resolve abstract hypotheses; and the relief sought by the trustees must not involve resolution of any disputed issues of fact, as an application for directions proceeds on the basis of affidavit evidence. Historically, the opposing Australian opinion, as espoused in Harrison v Mills, was the court’s statutory jurisdiction to give advice was limited to matters of minor importance.8 The court in Harrison held in respect of New South Wales (NSW) Trust legislation9: [An application for advice under the statute] remains a matter of advice by the Court to a trustee who is in doubt as to the propriety of a course of action which he proposes to undertake. I would think it extremely doubtful whether any dispute between trustees—and I do not include within that designation a bona fide difference between trustees as to the proper construction of a document—would be entertained by a court under s. 63. Certainly questions of interpretation of the document, if they involve the question of breach of trust by any of the trustees, would not be determined under s. 63, where the basic facts upon which the Court acts are not, in any sense, proved or tested. Kós J did neither address the Australian authority in Foulkes, nor did the Court of Appeal in Chambers. The court’s concern in Harrison appeared to be heavily influenced by the number of areas in which the applicant sought advice/directions [the questions upon which advice and direction were sought were numbered (a–m) inclusive] and the scope of the questions asked (one of the questions asked whether any of the trustees, and if so, which, should be removed from the trust). The inherent jurisdiction of the court was not addressed, and no authority was cited for the limited approach to giving advice pursuant to the trust legislation in question. It is the authors’ opinion that the approach in Foulkes and Chambers better aligns with the court’s historically broad equitable jurisdiction to supervise trust administration. The Australian Courts seem to now recognize this and are moving away from the reasoning in Harrison. This is evident from the decision of the High Court of Australia in Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand.10 In Macedonian Orthodox Community Church, a majority of the High Court clarified several matters relating to the statutory jurisdiction to give advice/directions to trustees at issue in those proceedings (NSW Trust legislation). It first noted that there were no implied limitations on the court’s power to give advice, and the court should not read such limitations into the statute in question.11 Furthermore, it found there was nothing in the statute itself which limited its application to ‘non-adversarial’ proceedings, or proceedings other than those in which the trustee was being sued for breach of trust.12 The court held that advice could be given where there were controversies among beneficiaries, or where beneficiaries were in dispute with trustees about those controversies.13 The only jurisdictional bar was that the applicant had to point to the existence of a question respecting the management or administration of the trust property, or a question respecting the interpretation of the trust instrument.14 The High Court also noted the statutory provision operated as an exception to the court’s ordinary function of deciding disputes between competing litigants. It allowed an applicant to receive private advice. In the authors’ opinion, the approach in Macedonian Orthodox Community Church (while limited to the application of NSW Trust legislation) is logically sound. It makes little sense for the court’s statutory jurisdiction to give advice to trustees—which was intended to enact the court’s broad equitable jurisdiction—to be limited to matters of minor importance. If the statutory jurisdiction in Australian states was intended to be so limited, then trustees in those states would be unable to make a Beddoe application under their respective trust legislation. A Beddoe application seeks the court’s advice as to whether trustees should bring or defend court proceedings.15 A trustee who applies for a Beddoe’s order is protected from the costs consequences of subsequent litigation if they follow the court’s advice. If the statutory jurisdiction to give advice is limited to questions concerning non-adversarial matters, then it would be difficult for courts to resolve Beddoe applications (given they often involve adversarial third parties) and for prudent trustees to then be protected when they engage in litigation on behalf of the trust.16 It is worth remembering that a trustee’s role is onerous and often gratuitous. Courts should not unnecessarily decline applications for directions when trustees clearly need the court’s assistance to resolve contentious trust matters. To do so would be inconsistent with the reasons the court’s equitable jurisdiction to supervise trust administration initially developed. Surrendering discretion? When a court is asked to give advice in an application for directions, the type of situation the trustees find themselves in affects the scope and nature of the court’s advice. An unreported judgment of Robert Walker J, oft-cited in later jurisprudence, set out the four main types of applications for directions that arise.17 The four types are as follows: an application concerning whether a proposed action is within the trustees’ powers. This is a question of the trust instrument, or a statute, or both; an application as to whether a proposed course of action is a proper exercise of the trustees’ powers. In this situation, there is no real doubt as to the nature of the trustees’ powers. The trustees agree as to how to exercise them, but as the decision is particularly momentous, the trustees wish to obtain the blessing of the court of the action. In this case, the trustees are not normally surrendering their discretion to the court, but frequently seeking to protect themselves from disgruntled beneficiaries; an application for directions where the trustees are deadlocked or disabled as a result of a conflict of interest and so cannot properly come to a decision. In this case, the trustees surrender their discretion to the court who makes the decision for them; and an application for a direction to, in effect, approve a course of action the trustees have already taken and which is being attacked. The most contentious category (in the context of this article) is the third category, where the trustees surrender their discretion to the court. The court will only accept such a surrender where there are good reasons for doing so,18 one of the most obvious reasons being that the trustees are deadlocked (but honestly deadlocked, so the question at issue cannot be resolved by removing one trustee rather than another).19 Another good reason is where the trustees are disabled as a result of a genuine conflict of interest. If the trustees surrender their discretion to the court, then the court takes the place of the trustees in making the decision. In doing so, the: court will act as a reasonable trustee could be expected to act having regard to all the material circumstances and is not bound by the wishes of any beneficiary.20 In New Zealand, the Court of Appeal has confirmed that trustees may come to the court and say that they are in doubt as to how they ought to exercise their discretion and surrender that discretion to the court.21 The Australian position appears to be the same.22 The authors realize that where a court accepts the surrender of trustees’ discretion, it can appear as if it is overstepping its supervisory jurisdiction by assuming the role of decision maker. However, when viewed against the backdrop of the court’s broad equitable jurisdiction, which extends to compelling due administration of a trust, it is clear that the court’s role was never intended to preclude intervention into trust matters where the circumstances necessitated it. Furthermore, there are limits on the trustee’s ability to seek a surrender of discretion in an application for directions; the de facto rule is that the court will only accept a surrender of discretion where there are good reasons for doing so.23 For example, if the trustee (or trustees in question) surrender their discretion as a means of avoiding an exercise of independent judgment, it is unlikely a court will step into their shoes. In Re Allen-Meyrick’s Will Trusts, the court grappled with an application for the determination of various questions, inter alia, whether the trustees’ ongoing discretion to apportion money under a will was one which could be surrendered to the court.24 The defendants’ position was the discretion could not be surrendered to absolve the trustees from exercising their judgment regarding its exercise in the future. The court found as follows25: [There is] great force in the submission that the court ought not to accept a surrender of such a discretion as this and relieve the trustees of their obligations to consider from time to time how the power ought to be exercised. I do not think that it would be right for the court to accept any sort of surrender of a power which would relieve the trustees of their obligation, from time to time, to apply their minds to the problem and, if they cannot themselves arrive at a satisfactory answer, to inform the court of the relevant circumstances and seek the court’s direction from time to time. […] […] [I]t is incumbent on the trustees to make up their minds, as income becomes distributable from time to time, to what extent they will apply it for the maintenance of the first defendant […] The court concluded the discretion was not one which could be exercised in advance nor one the trustees could surrender to the court or that the court would permit the trustees to deal with in that way.26 In entertaining applications for advice, courts should be mindful of trustees simply seeking to evade their obligations. However, where trustees are in a position of conflict with regard to a potential trust decision, this would be a good reason to surrender their discretion to the court. A trustee should not, on a strict application of the fiduciary no-conflict rule, put themselves in a position where their personal interests conflict with their duties as trustees. Accordingly, if any exercise of discretion is likely to be challenged on the basis of a conflict of interest (ie, where a trustee is a beneficiary and the other beneficiaries show animosity to the trustee), then the trustee should consider surrendering their discretion to the court. The trustee would then be protected in carrying out the court’s advice—even if they personally benefit from the court’s determination. Conversely, in some cases, even where trustees are conflicted, it does not necessarily mean that they would be required to surrender their discretion to the court if doing so would add significant time and expense to proceedings. In Re Drexel Burnham Lambert UK Pension Plan, the trustees of a pension scheme who were also beneficiaries under the scheme had a discretion to apportion a surplus after the scheme was dissolved.27 They applied to the court for directions to approve their proposed exercise of their discretion. While the trustees had sought professional advice and consulted with beneficiaries as to their final proposal for apportioning the scheme’s surplus, the court still concluded they were in a position of conflict. One potential way of absolving this conflict, the court noted, was if the trustees surrendered their discretion to the court. They had not initially sought to do so—merely asking for the court’s approval of their proposal. However, the court concluded this approach would cause considerable delay and further expense as: not only the trustees but equally the four classes of beneficiaries would […] wish to file further evidence and, on the strength of it, each class of beneficiaries would then press for the adoption of proposals more favourable to each respectively than is the current proposal.28 Any advantage gained by a class of beneficiaries would be eaten up in legal costs trying to obtain a more favourable proposal. Overall, the court concluded that the no-conflict rule did not deny the court jurisdiction to grant directions in respect of a proposal by conflicted trustees (given the flexibility of the rules of equity). The proposal itself had stood up to ‘jealous and scrupulous examination’, commended itself to the court, and was approved.29 A further caveat or limitation on trustees’ rights to surrender their decision-making power is that the statutory procedure to seek judicial advice cannot be used where there are material disputes of fact. Evidence in applications for directions under the various statutes is normally given by way of affidavit. Accordingly, the court cannot properly test and evaluate material disputes of fact between parties. This limitation ensures that contested claims for breaches of trust disguised as claims for directions cannot be resolved by the court using a summary procedure. If the court is asked to make a decision for the trustees, then the trustees must put before the court all the relevant facts (both good and bad) so that the court can make an appropriate decision. The Privy Council in Marley v Mutual Security Merchant Bank and Trust Co Ltd provided the following guidance for trustees seeking to surrender their discretion30: A trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his fiduciary duties and discretion is always entitled to seek proper professional advice and, if so advised, to protect his position by seeking the guidance of the court. If, however, he seeks the approval of the court to an exercise of his discretion and thus surrenders his discretion to the court, he has always to bear in mind that it is of the highest importance that the court should be put into possession of all the material necessary to enable that discretion to be exercised. It follows that, if the discretion which the court is now called upon to exercise in place of the trustee is one which involves for its proper execution the obtaining of expert advice or valuation, it is the trustee’s duty to obtain that advice and place it fully and fairly before the court, for it cannot be right to ask the judge in effect to assume the burdens of a trustee without the information which the trustee himself either has or ought to have to enable him to carry out his duties personally. The court ought not to be asked to act upon incomplete information and, if it is so asked, the proper course is either to dismiss the application or to adjourn it until full and proper information is provided. (Emphasis added) Trustees considering making an application for directions and surrendering their discretion to the court should heed the Privy Council’s advice. If they fail to provide the court with sufficient information, then their application can be adjourned or dismissed. This would result in wasted costs and time at the expense of the trust fund. Removal of trustees Courts in England, New Zealand, and in most of Australia have statutory jurisdiction to appoint a trustee in another trustee’s stead. The most straightforward use of the statutory procedure is for simple applications, where there is no dispute as to the facts and it is difficult or impractical to appoint another trustee under the trust deed. Where a trustee or trustees seek to remove each other, or a beneficiary seeks to remove the trustees, an applicant should rely on the broader inherent jurisdiction of the court. A brief outline of the courts' removal jurisdiction in England, New Zealand, and Australia is set out below. England Under section 41(1) of the Trustee Act 1925 (UK), a court may appoint a new trustee or trustees when it is found inexpedient, difficult, or impracticable to do so without the assistance of the court. Section 41 lists non-exhaustive situations where the court may make an order under section 41, including where a trustee lacks capacity to exercise his functions as a trustee, or is a bankrupt, or is a corporation which is in liquidation or has been dissolved. In England, the general position is section 41 authorizes a trustee to be removed against his will.31 In considering an application under section 41, the court will consider the wishes of the settlor and beneficiaries, whether there is a conflict of interest between the settlor/beneficiary interests and those of the proposed trustee, and the impact of the appointment on the execution of the trust.32 A court may decline to exercise its jurisdiction under section 41 where there is a dispute of fact in relation to the application.33 Furthermore, a court cannot remove a trustee without appointing a substituted trustee in that person’s stead under section 41. For those circumstances, and any others where the statutory power of appointment is not applicable or unsuitable, the court has an inherent jurisdiction to remove a trustee without appointing a new trustee.34 Although, it is important to note that it is very unlikely that a court will simply remove a trustee without appointing a new trustee unless an adequate number of trustees will remain after the removal, or the need for the removal is urgent.35 Both an application under section 41 and one made pursuant to the court’s inherent jurisdiction to remove a trustee will require the court to consider the welfare of the beneficiaries. If the welfare of the beneficiaries requires the removal of a trustee, even where the trustees have been guilty of no misconduct, then this is the proper course of action for the court to take.36 This is the main principle on which the equitable jurisdiction to remove trustees is based.37 New Zealand Under section 51 of the Trustee Act 1956, a court can, whenever it is expedient to appoint a new trustee (or trustees), and it is found inexpedient, difficult, or impracticable to do so without the assistance of the court, substitute a new trustee for any of the existing trustees. Section 51(2) then lists non-exhaustive circumstances in which a court can make such an order, including where a court has found a trustee is: guilty of misconduct in the administration of the trust; convicted of a crime involving dishonesty; is a mentally disordered person; is a bankrupt; or is a corporation that has ceased to carry on business, or is in liquidation or has been dissolved. Unlike England, courts in New Zealand have not adopted the approach that section 51 establishes a statutory jurisdiction to remove a trustee against his or her will if that trustee is willing and able to continue. However, apart from this, the court’s approach under section 51 applications is generally similar to that under the English legislation. In exercising this power, the court is likely to look to the welfare of the beneficiaries,38 the express/implied intentions of the settlor(s) and will likely be mindful of the fact that the section 51 power should be exercised to promote the purposes of the trust.39 Section 51 cannot be used to simply remove a trustee, nor is it likely to be applicable where there is a dispute as to the facts of the application, or where a trustee does not wish to be removed. In those circumstances, the courts can fall back on their inherent jurisdiction to remove trustees (which stems from the court’s principal duty to see that a trust is properly administered). Australia Courts in Australia generally have statutory jurisdiction to appoint new trustees in substitution for old ones.40 It is not fully settled whether the court can use the statutory jurisdiction to remove a trustee against his or her will, but recourse can be made to the inherent jurisdiction of the court in those circumstances.41 The court’s jurisdiction is exercised with: a view to the interests of beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trust and a faithful and sound exercise of the powers conferred upon the trustee.42 Removal of deadlocked trustees This summary of the law clarifies that in the three jurisdictions surveyed in this article, the approach taken to applications for removal of trustees is largely the same and any restrictions under statutory jurisdictions can be overcome by relying on the inherent jurisdiction of the court to remove trustees. The question that arises in situations where trustees are deadlocked, is where to draw the line between a prudent—but argumentative trustee (ie, a ‘difficult’ trustee)—and a trustee who is unnecessarily hostile. It is important to emphasize that not every case of trustee deadlock or disagreement will warrant the removal of a trustee. The administration of a trust, especially a family trust with numerous beneficiaries, can involve the making of many contentious decisions. Mere evidence of friction between the trustees and beneficiaries in making these decisions is not sufficient to warrant a trustee being replaced or removed unless there is evidence this friction endangers the welfare of the beneficiaries.43 In Osborne v Wilson, the two trustees sought to be removed were former de facto partners whose relationship had progressively worsened since their separation. The plaintiff (third trustee) applied for an order removing the trustees given they were deadlocked in relation to trust management. This was not a case of mere friction between co-trustees as the relationship between the former partners had significantly deteriorated. The court did not have confidence in any of the trustees remaining objective and impartial in trust decisions moving forward and removed all three trustees and appointed an independent trustee company in their stead.44 As is apparent from Osborne v Wilson, actual misconduct is not required before a trustee will be removed, rather the trustee must have engaged in acts or omissions which endanger the trust property, are dishonest, or show a lack of proper capacity/fidelity to execute trustee duties.45 In Osborne v Wilson, the hostility was said to have hindered the ex-partners’ capacity to be trustees. In considering an application to remove an obstinate trustee (or trustees), the court should look to whether the hostility between the trustees obstructs the administration of the trust and leaves no prospect of improvement in the future.46 A further helpful case is Scott v Scott, where both the plaintiff and defendant sought to remove each other as trustees of a family trust. The parties were brothers and had fallen out after their mother’s (the settlor’s) death. The court noted that mere hostility between the trustees was not enough to justify the removal of either one, but it would be if the breakdown between the trustees had directly impeded the running of the trust and would do so in the future. The court found for the defendant and removed the plaintiff as trustee given no substantial legitimate criticism could be levelled at the defendant’s conduct as a trustee since 1996. In comparison, the court found the plaintiff’s hostility towards the defendant had and was continuing to have a deleterious effect on the administration of the trust. Accordingly, the plaintiff was removed.47 A further example is KAMG v STG, where the court, when dealing with deadlocked trustees, determined it would be appropriate for either one or both trustees to be removed. The deadlocked trustees were a husband and wife pair who had separated since the formation of the trust, and the court found the husband’s refusal to agree to the sale of trustee property was inconsistent with the proper exercise of his discretion as a trustee.48 It should be noted that a majority of the removal decisions dealing with deadlocked trustees occur in the context of a trust where the trustees are former de facto or married partners or related parties. These are not the only cases where situations of deadlock arise, but are likely to be the majority of cases where removal applications will be made. It is not difficult to assume that former partners (whose relationship ended acrimoniously) will find it difficult to come together to make unanimous trust decisions moving forward. Where the deadlock is in the nature of a professional disagreement (as opposed to hostility towards the other trustee), then an application for directions as to how the trustees should exercise their discretion is the more appropriate course of action to take (with the trustees surrendering their discretion to the court). There are an increasing number of cases where the trustee sought to be removed is not malevolent or conflicted but is simply a difficult personality to work with. Trust administration can be seriously hindered by such persons. They often find fault with the work of independent trustees over minor matters, and the trust incurs great expense and time in trying to deal with the subsequent issues that arise as a result of the accompanying delay. It is worth emphasizing, however, that this delay must be of such severity that it impedes trust administration in order for it to justify removing the obstinate trustee. In Guest v Warner, the court cautioned that the court’s power of removal should not be exercised lightly49: […] the motivating reason for trustees’ removal must be some ‘detriment to the administration of trusts’.50 ‘Expedience’ is not enough on its own for the Court to appoint new trustees. There must also be a reason for the Court’s assistance: for example, in circumstances in which others have powers to appoint, some reason to doubt those powers will be exercised appropriately.51 Removing a trustee is an inherently discretionary exercise to be made in pursuit of the ‘satisfactory execution of the trust for the welfare of the beneficiaries’.52 As to who the Court will appoint, the general principle is ‘to appoint the person or persons best suited to administer the Trust in the circumstances prevailing’.53 More specifically, the court is guided by three considerations: settlor’s intentions: the court will give considerable weight to the expression of the settlor’s intentions as to the identity of the trustees, if such can be discerned. But the court is not bound by them, and may depart from them ‘if good cause is shown’; neutrality between beneficiaries: trustees must be neutral and even-handed as between beneficiaries with different interests. Courts typically will refuse to appoint beneficiaries (or their spouses or relatives or advisors) or others interested in the trustee property even though their appointment would not be objectionable on that ground alone; and promotion of the purposes of the Trust: this is inherent in any trusteeship. Removal of trustees under the trust deed The above discussion explores the role of the court in assessing applications to remove deadlocked or otherwise obstinate trustees. However, many trust deeds give the settlor or other trustees the power to remove a trustee without seeking the court’s assistance. This appears, at first glance, to be a much simpler (and cheaper) option for dealing with difficult trustees. Clearly, where a trustee has been convicted of a serious offence involving dishonesty, it can hardly be contested that they should remain as trustee. However, very few trustee removal situations are that clear. If co-trustees have any doubt as to the probity of removal under the trust deed, then an application for removal should be made to the court instead. The question the court or other trustees must consider is whether the trustee is preventing the proper administration of the trust (eg, by refusing to sign a document) or negatively affecting the interests of beneficiaries by refusing to carry out their duties promptly. If the trustee concerned is a genuine and serious impediment to trust administration (rather than a case of an irritating but mostly competent trustee), then the other trustees should make a removal application to the court. The authors advise that this appears to be the safer option rather than simply removing the trustee under the trust deed (unless it is clear the trustee should be removed). If there is doubt, then it is better to seek the court’s assistance than to invite further litigation from the disgruntled trustee. An example of the consequences of improper removal of a trustee under a trust deed was examined by the court in the Waho v Te Kohanga Reo National Trust.54 In Waho v Te Kohanga Reo National Trust,55 Waho, a trustee, considered the Trust ought to have made disclosure to the Government about allegations of dishonesty which had arisen within the Trust. The other trustees did not agree but nonetheless, Waho contacted the Government. He was subsequently removed as a trustee. He succeeded in his claim that he had been wrongly removed, his honorarium was reinstated, and he was awarded indemnity costs in a subsequent costs decision from the Trust.56 This decision is a good reminder of the perils of removing a trustee under the Trust deed; if the trustees are in doubt, then they should seek the court’s assistance. Conclusion Trustees should keep the welfare of the beneficiaries at the forefront of their mind in making trust decisions. If they are unsure as to how best to exercise a discretion conferred upon them, or the trustees disagree as to the best course of action, then it is open for them to seek the guidance of the court to protect themselves should the decision later be challenged by beneficiaries/other trustees. If the trustees’ disagreements are founded on a bed of hostility, then it is more likely that a trustee will have to consider the possibility of stepping down from their role or filing an application to remove a fellow trustee. When faced with a removal application, trustees should seek the advice of an independent lawyer and review their personal interests in continuing as a trustee. If they are not vested in personally administering the trust, then a suggestion to the opposing trustee that both trustees step aside in favour of an independent trustee might be viewed more favourably. Overall, it is evident the court will step in to support trustees who find themselves in a state of disagreement with their co-trustees. This is in keeping with the supervisory nature of the court’s jurisdiction over trusts and is likely to bring some comfort (if not total comfort) to trustees concerned about how to administer trusts in the face of contentious decision-making and obstinate co-trustees. Kate Davenport QC is a barrister at Bankside Chambers in Auckland, New Zealand and at Outertemple Chambers in London (www.bankside.co.nz; www.outertemple.com). Her principal areas of practice are in equity and trusts. Email: [email protected]. Jovana Nedeljkov is a junior barrister at Bankside Chambers who practices in equity, trusts, contract, and minor criminal matters. Email: [email protected]. Footnotes 1. English CPR, pt 64; Trustee Act 1956 (NZ), s 66; Trustee Act 1925, s 63 (NSW); Trustee Act 1925, s 63 (ACT); Trusts Act 1973, s 96 (QLD); Supreme Court (General Civil Procedure) Rules 2015, Order 54 (VIC); Trustee Act 1936, s 91 (SA); Trustees Act 1962, s 92 (WA). 2. Neagle v Rimmington [2002] 3 NZLR 826 (HC) at [24] citing Melville v NRMA Insurance NZ Ltd HC Wellington CP 70/01, 17 April 2002. 3. Harrison v Mills [1976] 1 NSWLR 42. 4. Morice v Bishop of Durham (1805) 32 ER 947 (Ch) 954. 5. [2017] NZAR 882 [2017] NZCA 131. 6. ibid [32]. 7. [2015] NZAR 1441 (HC) [42]–[50]. 8. Harrison (n 3) 45. 9. ibid 45. 10. (2008) ALR 250 [2008] HCA 42 (‘Macedonian Orthodox Community Church’). 11. ibid [56]. 12. ibid. 13. ibid [57]. 14. ibid [58]. 15. Re Beddoe [1893] 1 CH 547. 16. It is important to note, however, that courts have held that disputes which are hostile as between trustees and beneficiaries are not normally suitable for Beddoe applications. See Alsop Wilkinson (a firm) v Neary [1995] 1 All ER 431. 17. See excerpt in Public Trustee v Cooper [2001] WTLR 901, 923–24. 18. ibid 923. 19. ibid 923. 20. Lynton Tucker, Nicholas Le Poidevin QC and James Brightwell, Lewin on Trusts (19th edn, Sweet & Maxwell 2015) [27-083], citing Thrells Ltd v Lomas [1993] 1 WLR 456, 467 and Re Ezekiel’s Settlement Trusts [1942] Ch 230. 21. Chambers (n 5) [33]. 22. LexisNexis, Halsbury’s Laws of Australia 430 Trusts ‘Administration of Trusts: Intervention by the Court’ [430-5060] (25 February 2019) citing New Zealand authority Gailey v Gordon [2003] 2 NZLR 192 [33], [34]. 23. Public Trustee (n 17) 23. 24. Re Allen-Meyrick’s Will Trusts [1966] 1 All ER 740. 25. ibid 743. 26. ibid 744–45. 27. [1995] 1 WLR 32 Ch D. 28. ibid 39. 29. ibid 42. 30. [1991] 3 All ER 198 (PC) 201. 31. Re Henderson [1940] 1 Ch 764. 32. John McGhee (ed), Snell’s Equity (33rd edn, Sweet & Maxwell 2015) [27-019] citing Re Dickinson’s Trusts [1902] WN 104 and Re Tempest (1866) 1 Ch App 485. 33. Re Henderson (n 31). 34. Tucker, Le Poidevin QC and Brightwell (n 20) [13-062]. 35. ibid. In the case of urgency, the court will normally appoint a receiver pending an appointment of new trustees by the court at a later point, or other appropriate arrangements would have to be in place for the ongoing administration of the trust. 36. Letterstedt v Broers (1884) 9 App Cas 371 (PC) 386. 37. ibid 387. 38. Letterstedt was applied by the Court of Appeal in Hunter v Hunter [1938] NZLR 520 (CA). 39. Sandford v Lambert [2013] NZHC 3487 [6]. 40. Trustee Act 1925, s 6 (ACT); Trustee Act 1893, s 11 Pt IV (NT); Trustee Act 1925, s 6 (NSW); Trusts Act 1973, s 12 (QLD); Trustee Act 1936, ss 14, 14A, Pt 5 (SA); Trustee Act 1898, s 13 (TAS); Trustee Act1958, ss 41, 42 (VIC); Trustees Act 1962, s 7 (WA). 41. Monty Financial Services Ltd v Delmo [1996] 1 VR 65, 76. 42. LexisNexis, Halsbury’s Laws of Australia 430 Trusts, ‘Vacation of Trustee Office: Removal of Trustees’ [430-3640] (25 February 2019). 43. Letterstedt (n 36) 389, note that this excerpt in the judgment is discussing friction between trustees and beneficiaries, but the principle is equally applicable as to relations between trustees. 44. Osborne v Wilson HC Auckland CIV-2005-404-1252, 8 September 2005. 45. ibid [22]; Letterstedt (n 36). 46. See, Re Chiswell HC Auckland M 770/99, 4 June 1999 where a brother and sister were removed as administrators of their father’s estate as they were unable to agree. 47. Scott v Scott [2012] EWHC 2397 (Ch). 48. KAMG v STG [2013] NZHC 1767 [93]. 49. [2018] NZHC 666 [25], [26]. 50. Green v Green [2016] NZCA 486, [2017] 2 NZLR 321 [146], [153]. 51. Attorney-General v Ngati Karewa and Ngati Tahinga Trust (2001) 1 NZTR 11-012 (HC) [68]. 52. Green (n 50) [606]. 53. Medelssohnm v Centrepoint Community Growth Trust [1999] 2 NZLR 88 (CA) 97. 54. [2018] NZHC 1935. 55. ibid. 56. ibid 3388. © The Author(s) (2019). Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)

Morrison,, Scott

doi: 10.1093/tandt/ttz017pmid: N/A

Abstract Takaful is the Islamic counterpart of indemnity-based insurance. It is a cooperative, charitable scheme comprising a fund compensating participants in case of the occurrence of specified adverse events. The features of takaful distinguishing it from insurance give rise to three legal problems: first, the voluntary, non-contractual donation—counterpart of a premium; secondly, the capacity in which the takaful operator invests and manages the fund; and thirdly, the operator’s obligation to return the residue of the fund to participants at scheme expiry. This article explores how the introduction of the English trust provides an amenable solution to these three problems. Introduction With the establishment of Cobalt Underwriting in London in 2012,1 the specialist insurance sector purporting compliance with Islamic law gained a foothold in Britain.2 This sector is described by the Arabic word ‘takaful’.3 The reasons why insurance policies as usually designed (‘general insurance’) do not comport with shari’a—or to put the point affirmatively, why the devout Muslim would prefer to participate in a takaful scheme over purchasing a general insurance policy—are well known and need not be rehearsed here.4 Suffice it to say, as it is crucial for the analysis to follow, that Islamic law requires that takaful be a charitable, co-operative undertaking rather than a commercial, profit-making enterprise.5 This article’s objects The purpose of this article is two-fold. First, to identify a trio of legal problems ensconced at the heart of takaful. These problems pertain to those essential precepts that distinguish takaful from general insurance. These precepts are the oxygen in the blood circulating to the organs (countries) in which the shari’a compliant insurance industry exists. Secondly, this article endeavours to propose a novel legal analysis that resolves these problems. The proposed solution introduces ordinary principles of equity and English trust law into this Islamic legal creation. To the extent that the prescription set out here is adopted the article will contribute to the enhanced health and vibrancy of takaful: an innovative instantiation of Islamic law that can help to meet the needs of modern life and societies—whether or not Muslims represent a majority or a minority in the society in question. Specifically takaful can add another—albeit another only monetary—shield against the slings and arrows of (outrageous) fortune. Takaful and general insurance Participating in a takaful scheme confers the same benefit as purchase of an indemnity-based insurance policy.6 That benefit is a monetary benefit. In case an uncertain, adverse event transpires, the takaful participant receives a payment to compensate them for the consequences of the event, as with general insurance law and custom.7 The full gamut of personal attributes and property that may be diminished, lost, or damaged (as a result of an uncertain event) comprising insurable interests in the general insurance sector can in principle also be underwritten by means of takaful. The parties Although there are a variety of names assigned to the parties in a takaful arrangement, for the purposes of this article the parties will be referred as ‘participant’ and ‘operator’. These correspond approximately to ‘insured’ and ‘insurer’ in a contract of insurance. A takaful scheme and an insurance policy are each time-limited, with an expiration date agreed at, or before commencement. However, in takaful, unlike in insurance, at expiry any funds not disbursed to participants during the term of the scheme (nor expended as operating costs) must be returned pro rata to the participants (‘the expiry payment’). This obligation follows from takaful’s charitable purpose. The final payment is an added benefit beyond those offered by a general insurance policy where any profits are for the shareholder or for the future operation or growth of the insurer. Risk arbitrage and the float In general insurance For simplicity, setting aside contractual devices and routine industry and law of insurance practices—such as excesses, exclusions and limitations clauses, the duty of fair presentation, subrogation, etc—the sources of profit in general insurance are: (i) risk arbitrage and (ii) ‘the float’. With respect to (i), actuarial science and statistical data have made forecasting the probability of events (adverse ones alone being in the ken of insurance) with some accuracy possible; the greater the number of insureds and the more data amassed about them and about populations and demographics at large, the greater the precision of the forecast. An insurer is in the business of essentially placing a wager on the probability of the incidence of specified events, and damage or injury flowing as causal results therefrom. As with any wager success is not guaranteed and absent re-insurance8 systemic risks triggering loss and damage beyond that predicted or prepared for can overwhelm an insurer. Again to simplify, and setting aside alternative corporate finance methods, premia bankroll the wager. With respect to (ii), the insurer invests the premia. Exploiting the time value of money and with the application of some investment savvy, and perhaps with the help of a little old-fashioned luck, the insurer is able to meet short- and mid-term liabilities whilst profiting in the long term from the float: the time between when the insurer receives the premia until they must pay out its value in a claim. Insurance companies’ operation is, with respect to the float, functionally and in its effects the same as that of a bank operating under the fractional reserve banking system; leverage and profitability are positively correlated, and it is therefore in the best interest of the insurer or the banker to mobilize the maximum amount of their capital, subject to regulatory requirements. The moral hazard and prospect of taxpayer-financed bailouts (as well as the manifest possibility of either an insurance or banking failure triggering an economic recession)9 are key reasons why insurance and banking (including their Islamic variants, notwithstanding their more risk averse postures) are highly regulated sectors in countries including the UK. In takaful Turning to takaful, the position in relation to (i) is not favourable in Islamic law. However, the next paragraph will suggest some arguments in defence of it. The cardinal interdictions with which takaful must contend are two-fold.10 First, that against speculation (maysir, in Arabic), which is understood by analogy with the games of chance played in pre-Islamic Arabia. Modern equivalents to these games would be the throwing of dice, spinning of a roulette wheel and card games where there is a greater proportion of luck of the draw over memory or skill. Secondly, that against excessive risk (gharar). Insurers, like bankers, trade in risk—for profit. Risk arbitrage per se is disapproved in Islam, and doing it for profit compounds the negative value assigned it by shari’a. However, in response to the first interdiction, the takaful operator can reasonably argue in their defence that in order to determine a fair levy on the takaful participant it must make calculations and probabilistic predictions. If it fails to estimate probability and to venture forecasts it will be unable to meet its liabilities (participants’ claims) as they fall due. Such a failure would defeat the charitable purpose of the takaful scheme and the mutual cooperation between the participants and the operator. Secondly, in relation to gharar,11 the insurer can reasonably argue that takaful actually reduces risk—both in aggregate and with respect to any given participant. This is its principal purpose, as with general insurance. It is often stated in the literature supportive of takaful that it is a form of risk-sharing (between participants and between operator and participants), not a matter of risk transfer to the insurer alone.12 Islamic law does not categorically prohibit (ii) to the takaful operator. However, it severely circumscribes it by dint of two restrictions. First, since with the winding up of the takaful scheme the operator must return the residual fund to the participants, the duration of the float is truncated. It is coterminous with the takaful scheme and does not extend beyond it as would overlapping policies and funds held by a general insurance company. An insurer is not subject to this limitation imposed by the necessity to wind up and treat as discrete individual takaful schemes. A general insurer has the world of long-term investments (for instance, the ability to purchase and hold illiquid assets, such as property or other investments carrying high transaction costs or sold into thin secondary markets) at its disposal. Secondly, the Islamic ban on usury (riba’) which means, in short, that only screened equities, or other shari’a compliant investments, and not debt, debentures, or other fixed income instruments—may be purchased or traded by a takaful operator. The float (and for that matter risk arbitrage) are done for different motives and more conservatively than they are done in general insurance, although takaful falls to be regulated in the UK as general insurance, and has received none of the tax reliefs or other exceptional regulatory treatment that some shari’a compliant products (such as Islamic mortgages, or sale and leaseback sukuk) have.13 A broad-brush characterization from the vantage point of the religiously agnostic consumer or investor and one that fits Islamic finance and banking as well as takaful would be that these are conservative, cautious legal and financial techniques. The caution or—to place a more positive valence upon it—prudence of these rules and principles developed in hardscrabble Arabia and gradually elevated to become Islamic law (shari’a) renders them less profitable (in the good times), safer (in the bad) and a more valuable tool for portfolio diversification (in both good and bad).14 Comparative conclusion on insurance and takaful The duties of the takaful operator to the participants are greater than those of an insurer to an insured, but the operator’s rights and powers are circumscribed both by express rules and principles of Islamic law and by the generally charitable intent required for the conformity in letter and spirit to the mutuality that is the sine qua non of takaful.15 Nevertheless, the assumption upon which this article will proceed is that none of the obstacles or challenges explained thus far are insurmountable. They are at any rate not a result of absent or unclear legal analysis. They represent essential characteristics of the takaful sector and that which distinguishes it from general insurance. They will accordingly be treated below as axiomatic. Three legal problems with takaful In contrast with the previous section which distinguished general insurance and takaful, and identified some feasibility issues in relation to takaful, this section and the solution proposed in the next will focus exclusively on the legal analysis of takaful. A legal problem arises at each of three stages in the creation and operation of a takaful scheme: (i) the transfer of legal title to money (‘contribution’) from participant to operator, creating a ‘fund’; (ii) during the interval when the operator holds title to the fund, the legal capacity in which he or she does so is either unclear, unsatisfactory or both; and (iii) the obligation of the operator to pay the remainder of the fund (or its value) at expiry cannot be adequately explained by orthodox takaful principles. The first problem In the literature on takaful, the contribution is characterized as a tabarru’; this Arabic word is usually translated as ‘voluntary donation’.16 It may be compared to alms or, in the Catholic faith, to the practice of tithing. The translation itself invokes the Latin ‘donatio’. However, although the word for ‘gift’ in Arabic is not the same (it is the word ‘hiba’),17tabarru’, like donatio, implies that legal title passes from donor to donee, who takes absolutely, unconditionally and immediately. The donor transfers all rights in relation to the fund to the operator, retaining no legal interest in it. The contribution is irrevocable. The donee—here, the takaful operator—is under no further obligation to the donor. There is no distinction between legal and equitable title in Islamic law, as there is no equitable jurisdiction. There is instead a unitary conception of ownership, with ownership of property being a precondition of both tabarru’ and hiba. Tabarru’ is a fundamental and necessary element of takaful.18Tabarru’ is the sole source19 of the funds deployed to compensate participants during the life of the scheme and at its expiry, as with the simplified example of premia in general insurance above. If the contribution to a takaful fund is revocable or if it burdens the operator with new legal obligations, then it is neither a tabarru’ nor compatible with the Islamic law of takaful. An (in one sense) troublesome implication of tabarru’ is that, should the adverse event occur to a participant, the operator is under no legal obligation to compensate them. As a result of the meaning of ‘tabarru’’ the operator may lawfully retain or dispose of the fund as he or she wishes. The purpose of the takaful scheme would thus be defeated. This is an absurd result. A solution based on the Islamic law of contract, however, is possible. It avoids the absurd result in that (as in a contract of indemnity), the contribution is consideration for a promise of compensation (upon the incidence of the adverse event), which creates a right legally enforceable against the operator.20 However, the contractual analysis21 transforms the contribution from tabarru’ to consideration,22 which is fundamentally inconsistent with the nature of both tabarru’ and the charitable character of takaful. The binding force of a (legal) obligation may be welcome. However, the contractual means of creating that obligation renders the resulting arrangement general insurance, not takaful. The contractual solution then to this first problem produces a result that is not absurd. But it is unlawful. The solution proposed by this article aims to find a way to simultaneously preserve the voluntaristic, donative nature of tabarru’ whilst preserving the ability of a takaful scheme to function as an effective method of indemnifying scheme participants. The second problem The second problem relates to the ‘float’. Industry practice converges on two of the nominate contracts (available from the universe of Islamic legal contracts) for investment of the takaful fund: mudaraba (partnership) and wakala (agency). In the first, the operator holds the fund as the rabb al-mal, or financier/capitalist/investor, who can then, whether as an active or sleeping partner, enter one or more business ventures. In the alternative, the takaful participants may act as the rabb al-mal, in partnership with the operator who is actively engaged in one or more business ventures for profit.23 A second possibility is that the operator holds and invests the fund as an agent (wakeel) of the participants; this is a wakala (agency) agreement, with the relevant meaning of agency broadly the same in Islamic as in English law.24 The operator enters contracts on behalf of the participants investing their capital; with respect to English law the agency arrangement is distinct from a trust in that no equitable interest is created and legal title to both initial capital and profits are retained by the principal, with the agent having simply a fiduciary duty to account.25 Mudaraba and wakala and their deployment in takaful are in and of themselves uncontroversial. And there is no reason in principle why other nominate contracts such as that based on lease (ijara, if the operator were in the property business, for example) or mudaraba (asset- or commodity-based financing) should be unavailable for this purpose, nor that these or other classic Islamic contracts could not be subsidiary or collateral elements to an overarching agreement based on partnership or agency, or to a takaful scheme. The first problem with the adoption of any of the above forms of investment is that these are contracts. They are contracts of a commercial nature. Therefore, they give rise to the problem as stated above regarding the contractual analysis of tabarru’ and the uneasy marriage of a commercial undertaking with the essentially charitable purpose of takaful. The incompatibility of the charitable and commercial is not a decisive issue; however, it is a feature of takaful as constructed and conducted by the industry in the contemporary setting which this article contends can be improved upon, as will be set out in the solution proposed in the next section. The second issue is that in case the investments fail or disappoint expectations and the fund loses value, unless the operator has been negligent he or she does not have a duty under mudaraba, or wakala contracts to compensate the participant for the loss. On the contrary, the operator has a duty to share the losses and to refrain from offering, or providing a capital guarantee to participants at any stage pre- or post-contracting. The hallmark of avoiding usury and of the shari’a compliant investment industry is the sharing of risk; equities therefore (with their inherent risks) rather than fixed income investments are most compatible with Islamic law. Placing capital at risk during the float, even if expected by the rules and ethos of Islamic law, is evidently inconsistent with consumer and market demand as takaful schemes use interest-free loans in order to smooth returns and to cover short-falls where they occur.26 Like the use of a commercial contract in service of a charitable takaful scheme the use of a loan (provided it is not in itself commercial, ie at interest) is not a fatal flaw. However, it does not accord fully with the notion of risk sharing in the context of a takaful arrangement: legal liability is exclusively the operator’s, although actual exposure to risk may cascade to participants in case of operator insolvency. An additional result of the practice of lending and borrowing is that a takaful scheme can only be self-funding if the life of the scheme is long enough that the scheme can recover its losses and pay its debts before the expiry of the scheme. Otherwise it is not an exclusive and mutual self-help society, but one that relies partially on non-members. The third problem in relation to the float is that in case of operator negligence or of misappropriation of the fund, the participants have only personal remedies—the right to sue under the law of tort, or contract (if the notion of tabbaru’ was subsumed into contractual consideration). They would lack any and all of those protections that a proprietary interest in the fund would furnish them. Even supposing they were successful in a legal action against the operator, as unsecured creditors it would likely avail them little. The third problem In addition to the satisfaction of participating in a supportive mutual help arrangement, the merits of which may be amplified by means of religious fidelity and belief, an attractive feature of takaful—unlike an offer to purchase an insurance policy—is the expectation of receiving a payment at the expiry of the scheme. However, as indicated in the previous section, the equity-driven character of Islamic finance27 means that the expiration payment is not certain, nor can it be; there is a real risk that the expiration payment will be reduced or eliminated. This is not a problem specific to takaful and it is arguably an acceptable (and at any event an inevitable) risk from the standpoint of a participant seeking to conduct their affairs in a matter consonant with Islamic law and faith. The specifically legal problem in relation to the expiration payment is that there is no evident grounding for the obligation. Tabarru’ implies that the operator is under no legal obligation in relation to paying compensation during the life of the takaful fund nor at expiry. The immediate rejoinder to this statement of the problem is that the obligation to make the expiration payment follows from the nominate Islamic contracts themselves, mudaraba, or wakala. Although there is no necessity to formulating this as a duty to make a single payment after a period of time, as opposed to periodic payments, or payments at irregular intervals, any of these arrangements could be agreed under either contract. Whether as a form of partnership or agency in either case the operator is obliged to share profits in pre-agreed proportions (absent agreed costs and remuneration) with the participants. This resolution of the issue, however, is susceptible to the problems elaborated in the previous section: the inherent contradiction of attempting to harness commercial contracts designed for accumulation of profit in service of a charitable scheme. It also continues to be the case that the participants have no proprietary interest but only a personal claim against the operator—whichever of these two nominate contracts is used. These two observations might not be decisive reasons to reject customary industry practice of operators during the float. They are, however, sub-optimal. The engagement of participant capital in investments directly by means of agency (where legal title to the money does not pass to the agent)28 and where the participants are themselves investors (where they act as the rabb al-mal) are particularly undesirable as they become parties to commercial contracts themselves. The solution as set out in the next section will aim to advance a preferable solution, one that improves upon existing practice and also the accepted legal analysis of takaful—from contribution to expiration payment. Solution to problems one, two, and three The central thesis of this article is that an English trust can solve each of the three problems set out above. It is quite surprising that this seemingly obvious solution does not appear to have been suggested until now. This is all the more puzzling in that a significant proportion of those jurisdictions with Muslim majority societies (where takaful would have a natural retail market) are, as a legacy of the British Empire, common law systems (and Commonwealth members) whose lawyers and legal scholars would be familiar with the trust and the equitable jurisdiction invented in England and Wales. It may be less puzzling that the application of a trust did not occur to practitioners or takaful analysts in those jurisdictions that either do not or only latterly have become acquainted with the trust, for example those civil jurisdictions in the Arab Gulf states, or in most of the rest of the Middle East (the Levant, Turkey) and Francophone North Africa. The ‘takaful trust’ The takaful trust, to coin a phrase, could be structured in several ways, to accommodate features of particular takaful schemes, for example, to facilitate the desired duration and size of the scheme, to suit the characteristics of its participants, its location and material national law and policy. However, this section proposes one model as that which would most fully overcome the problems shared by takaful globally, as this article has set these out above. With this introduction of the trust into takaful this section aims to create a legal structure and analysis that will more fully conform to the letter and spirit of Islamic law than existing accounts of takaful design and their lawful operation. In the proposed model, the takaful participants are presumed to be liable for recurring payments to the fund during the life of the takaful scheme, or for a single lump sum payment at the outset, coterminous with the creation of the takaful fund. In doing so they act as settlors, making an irrevocable transfer of monetary value into a trust fund. These payments comprise the tabarru’. The participants divest themselves of a legal interest in the money. This avoids a conflict with the Islamic legal requirements regarding tabarru’ since there is no equitable jurisdiction known to Islamic law. From the standpoint of English law, however, the tabarru’ comprise the transfer of property into a trust. The documentation of the takaful scheme would necessarily reflect the intention to dedicate assets to a trust, and with it the implication of an intended creation of an equitable interest—with the transfer of the legal interest in the contribution to the operator. The takaful operator, as trustee, would segregate the fund from personal property and that from other schemes, or funds, as is already accepted takaful practice. Under the trust deed the operator would have a fiduciary power29 to transfer money from the fund to participants (and this class may be narrowed by a term of the trust to exclude those participants who are or who have fallen into arrears) who have suffered the anticipated misfortune as a result of which they have sustained the damage, harm, or other loss as envisaged by the trust deed. In addition to the fiduciary power to pay the scheme participants qua beneficiaries, the trust deed may impose upon the operator obligations regarding the float, and how the fund may be invested: this would include the requirement of investing in a manner compliant with shari’a. The participants would, by participating in the fund, have to accept the approach adopted by the scheme regarding the investment of trust property. If they did not accept it, they would of course have the option not to participate, although once having made a donation to the fund—since that contribution was irrevocable—they could not recover it. Throughout the scheme the operator would have the right to agreed remuneration and expenses, and these could be structured and agreed to account both for inflation and the charitable nature of the scheme. At the expiration date of the scheme, the residue (after exercise of the fiduciary power to make payments) including any possible investment returns (less operator expenses) would fall to the participants qua beneficiaries of a fixed trust, with the balance becoming payable to them, or only to those who had paid the full amounts in tabarru’, if that were so stipulated by the trust document.30 Transferring the duties of the operator and the interests of the takaful participants into the equitable jurisdiction is the mechanism through which the integrity and character of tabarru’ is preserved, and the additional benefits of the analysis offered here, created. In addition fiduciary duties and the remedies under equity regarding their breach are wider and greater than under the common law or under Arab laws or Islamic law itself. In case of the operator’s insolvency the fund would be protected from their creditors, protecting the participants in the takaful scheme. Although not a charitable trust within the meaning of English law, this express takaful trust analysis and in particular the inclusion of fiduciary duties is consonant with charitable intent, as well as capturing the trustee and fiduciary role under which the operator does not stand to enjoy the benefits of the trust property, and the obligation to pay (and the calculation of) the expiration payment. These advantages are not exhibited by the existing structures used for takaful schemes, which do not rely upon a trust, or confer any proprietary interest31 in the fund. In the nature of risk sharing In contrast to industry practice, which may be seen (as argued above) as sub-optimal, there would be no scope on the trust solution for the operator to add personal or other funds from outside the trust to meet obligations under the scheme; for instance if liabilities exceeded the value of the fund, or in the case of losses from the fund resulting from poor investment performance, or actual losses of trust capital. This would only be possible in cases of negligence or breach of trust where the court ordered the trustee (operator) to compensate the trust fund. The possibility of shortfalls is common as well to those agency and mudaraba structures as elaborated above—when loans are excluded. This danger highlights the importance of schemes being large enough to maximally benefit from what was called risk arbitrage above; not for the purpose of shareholder or operator profit, but for the purpose of fully discharging the purpose of—and obligations under—the takaful scheme. A possible objection to the proposed solution An objection which might be raised to the proposed solution is that a foreign legal system that is secular or rooted (at least historically) in different faith and national traditions is being ‘imported’ into or combined with Islamic law. To a doctrinal purist, since a major attraction of takaful is that it is a creation of the laws and principles of the Islamic faith (and not any other religion), this solution may seem to dilute, or even to eliminate altogether the claim to religious (ie Islamic) piety and authenticity. In particular, the entirety of the equitable jurisdiction and with it the trust are unknown to Islamic law. This section will attempt to demonstrate that such an objection would be mistaken. Rule of law and silence of the shari’a in Islamic law It is a settled proposition that the shari’a is exhaustive regarding the several gradations of immorality and illegality32 identified in Islam, meaning that anything not proscribed (and therefore categorized as haram) by shari’a is impliedly lawful (though not necessarily worthy of moral or religious approbation); in the absence of express legal provisions to the contrary, any conduct or transaction is lawful.33 A parallel could be drawn between the famous English public law case, Entick v Carrington,34 with the writing requirement of the law being an essential element of the doctrine of the rule of law. Equity and the trust are unknown to Islamic law. Therefore, there is no bar to these in shari’a either. Use of foreign legal devices in the contemporary shari’a compliant industry The company An excellent example of the ability of Muslim societies and Islamic legal authorities to not only countenance but to use to great effect legal structures and the laws of foreign, non-Islamic origin is the example of corporate personality and the structure of the limited company. In the same way that the trust is unknown to Islamic law, so too is the company. In the Islamic law of business organizations, the partnership is paramount, and as with the English Partnership Act 1890, the partnership lacks legal personality (which is retained exclusively by the partners themselves). The same is true of musharaka and mudaraba, joint ventures recognized by Islamic law since its inception. The first joint stock company appeared in the Islamic world as a result of the initiative of no less a figure than the Ottoman Sultan, in 1851.35 Since then the corporate structure has spread to become pervasive throughout Muslim majority societies including countries that purport, under shari’a provisos in their constitutions,36 to be governed by Islamic law. To give one example directly relating to the subject matter of this article, the AAOIFI expressly states that a takaful scheme can be organized as a company.37 The special purpose vehicle: company or trust A further illustration of the permeability of Islamic law and the modern shari’a compliant industries is that both the company and the trust itself are already central to Islamic finance transactions, featuring crucially in the structuring and transaction documentation of sukuk, a shari’a compliant financial capital market instrument38 which adopts a special purpose vehicle—either a company or a trust—formed in an offshore jurisdiction,39 for the issuance of debt or securitized equity. The Islamic charitable trust: the waqf Another legal construct upon which a takaful scheme may be based, in addition to mudaraba and wakala (discussed above), is the waqf. The waqf is the closest equivalent in Islamic law to the English trust.40 Broadly resembling an English charitable trust the purpose of a waqf must be ‘religious, pious, or charitable’.41 The settlor (waqif) transfers property irrevocably into the waqf and the actions of the trustee (mutawalli) disposing of the property and fulfilling the designated purposes of the waqf are governed by a document (the waqfnama). There may be, depending upon national law, scope for judicial management and enforcement of the waqf and removal or replacement of the mutawalli.42 However, there are key differences between the waqf and the trust. First, in the case of the waqf, legal title vests not in the mutawalli, but in God.43 As stated already, in Islamic law there is no parallel equitable jurisdiction in which to locate a beneficial interest. Secondly, unlike an English charitable trust which must be purely charitable, a waqf may amongst its religious, or charitable purposes also include private purposes such as a family settlement.44 Thirdly, with regard to the definition of ‘religion’, the case law and the UK Charities Commission would differ from Islamic law; in the latter, only Islamic religious purposes would be deemed charitable religious purposes.45 Fourthly, not only is there no rule against perpetuities in relation to the waqf, as in the case of the private trust,46 there is its opposite: a waqf must continue to operate until the property in it is diminished to a point where it can no longer perform its original purpose47 at which point the doctrine (as expressed at least by English judges in the South Asian context) of cy prés comes into effect.48 With regard to the fourth and final difference, and the permanent nature of a waqf, the trust better accords with takaful in that a takaful scheme is, as observed above, time limited. A takaful scheme cannot be perpetual; the participants themselves are human, not immortal. The takaful participants are not the public, as in an English charitable trust, but a finite set of individuals living concurrently. For this reason, the waqf is actually ill-suited to takaful and in particular to the expiration and the payment it occasions. The application of the trust set out above is that of an express trust, not a charitable trust, and is therefore as a matter of law (as well as by the trust document) limited in time. Also unlike the waqf, this application of the trust does not permit mixed objects (charitable, religious, and private) as the waqf would, making it more suitable to perform the single function of compensating participants and mobilizing their collective monies for their mutual (and, within this group, exclusive) benefit. Conclusion There is a historical argument that the waqf greatly influenced if not provided the inspiration for the English trust.49 If indeed the English trust is a repackaging of the waqf, the doctrinal purist of Islamic law may take some comfort in the fact that the solution proposed by this article advances a sort of second-generation Islamic legal creation when it proposes the trust. Whatever the merits or demerits of the evidence and arguments regarding the origins of the English trust, the contention in this article is that the trust—as it is now under English law—suits rather well the purposes of takaful and the Islamic legal and charitable commitments that are fundamental to it. The objection raised in the previous section regarding the use of non-Islamic law can be expanded to encompass fora of litigation and adjudication as well. However, as with the use of the trust and English law itself in shari’a compliant industries, this has proved in reality to be no bar. Both English law and courts are selected as governing law and disputes in (particularly larger) cross-border Islamic financial deals with some frequency. Furthermore, it is possible to satisfy this objection with the inclusion of an arbitration clause in the takaful scheme documentation; alternative dispute resolution and arbitration is readily available and has proved attractive in other jurisdictions in relation to Islamic financial disputes governed by English, Malaysian and other national laws. This article has examined legal problems central to the structuring and operation of takaful schemes, considering en passant the constraints under which any shari’a compliant form of indemnity or financing must operate—specifically in regard to risk arbitrage and the float. Whilst other works consider the penetration of takaful into insurance markets and its global distribution, or the future prospects of takaful,50 these matters have not been within the ambit of this article. In its examination of existing legal analysis and practices, this article identified three central problems with contemporary takaful. The principal contention of this article is that these can be solved by means of the English trust. The trust preserves the character of tabarru’, can accommodate the conduct and investment strategies of the operator during the float, and grounds the obligation to return the value of the fund at expiry. Each of these are attractive features of the law of takaful. And they are features that can be preserved, indeed enhanced, by means of the trust. Finally, this article dealt with the objection to combining Islamic law with foreign (ie non-Islamic) law and courts. With reference to the existing adoption of English law and courts as governing Islamic financial and more broadly commercial contracts, and litigation, the article maintained that the importation of foreign legal structures and principles is something with which Islamic jurists are demonstrably comfortable and indeed have done to good advantage. The silence of shari’a regarding equity and the trust is an opportunity rather than an obstacle. Whilst the waqf has a variety of uses in the modern world and has flourished in places, this article contended that it is inapt or in any event less apposite than the English trust for the structuring of a takaful scheme. Dr Scott Morrison is Reader in Commercial Law at Oxford Brookes University. His research specialism is Islamic finance and banking, capital markets (sukuk), and commercial applications of Islamic law. He has worked in universities in London, New York, Istanbul, Tokyo and Akita (Japan), Dubai and Abu Dhabi, and the Maldives. E-mail: [email protected]. Footnotes 1. The company began as a general agent in the Lloyd’s of London insurance market. Cobalt Insurance Holding Ltd operates under Cobalt Underwriting Services Ltd and Cobalt Advisory Services Ltd < http://www.cobaltuw.com/other-information/> accessed 21 January 2019. The idea for this article was conceived when participating as an audience member in a discussion at the World Congress of Middle East Studies (WOCMES), in Sevilla, Spain 20 July 2018. The trigger was as a response to Germán Rodríguez Moreno (IE Business School) and his talk: ‘Takaful in Crisis?’ Thanks also for thoughts (on takaful participants having a legal interest in the takaful fund) to Pablo Andrés Hernández González-Barreda (Universidad Pontificia Comillas) and his talk ‘Islamic Banking Practices in a Changing World: Sharia as Choice of Law and its Tax Implications’. 2. One of the few cases involving takaful in the courts of England and Wales was one which involved a takaful operator as defendant and which was appealed to the Supreme Court: Global Process Systems Inc and another v Syarikat Takaful Malaysia Berhad [2011] UKSC 5. The definition of takaful, whilst acknowledged by the court, was not at issue. Perhaps illustrating the convergence of takaful and general insurance or at least their overlapping features is the fact that the importance of this case (that has frequently been cited) was in relation instead to causation and proximate cause—[17] and [18]. 3. As it will appear in this article. However, in the financial and popular press, it is usually glossed as ‘takaful insurance’. This is a redundant formulation that is like saying ‘insurance insurance’ just as saying ‘shari’a law’ is like saying ‘law law’ as both ‘takaful’ and ‘shari’a’ are nouns, not adjectives. One of the magisterial, ingenious traits of Arabic is that the meaning of a word is based on a triconsonantal root and deducible from the grammatical form into which that root is manipulated; the form is created by adding vowels and consonants to the root. In the case of takaful, the root k-f-l means ‘to support, provide for, secure, guarantee’. The form (VI) of this word, takaful (with a long medial a), is the noun form denoting reciprocity and meaning ‘mutual or joint responsibility; solidary; mutual agreement’—Hans Wehr, Arabic-English Dictionary (Spoken Language Services, 4th edn, 1994). (A simplified Arabic transliteration system is in use in this article, so long vowels and diacritics will not be apparent.) The same root is also the basis for the word denoting guarantee, which itself is a common Islamic legal contract—for a discussion of guarantee, see W Al-Zuhayli, Financial Transactions in Islamic Jurisprudence, vol 2 (MA El Gamal tr, MS Eissa reviser, Dar al-Fikr, 2nd edn, 2007) ch VIII. With some justification both in law and other areas of human endeavour, a great deal of weight is based in Arabic etymology (and therefore dictionary definitions), in Muslim environments and Islamic contexts (owing to its status as the language of the Qur’an, among other reasons) justifying this linguistic digression. The Islamic Financial Services Board (IFSB), a leading Islamic finance standards setting organization based in Kuala Lumpur, Malaysia, in its Standard 8 (Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings, December 2009) states that ‘Takaful is derived from an Arabic word that means joint guarantee […] The underwriting in a takaful is thus undertaken on a mutual basis, similar in some respects to mutual insurance.’ 4. General insurance categorically violates four more or less central interdictions of Islamic law, those against: riba’ (glossed—without too much distortion—as usury), gharar (‘“excessive” uncertainty’), maysir (speculation), and ignorance (jahala)—each in specified senses as illustrated in the contract of sale. In shari’a, the contract of sale is the contractual type from which all other contracts are derived—Jeanette A Wakin, The Function of Documents in Islamic Law: The Chapters on Sales from Tahawī’s Kitab al-Shurut al-Kabir (SUNY Press, 1st edn, 1972) 1. For an accessible, concise discussion of the Islamic interdictions listed in this note, and the motivation of working around them by means of takaful, see Asyraf Wajdi Dusuki and Nurdianawati Irwani Abdullah, ‘Takaful: Philosophy, Legitimacy and Operation’ in Humayon A Dar and Umar F Moghul (eds), Chancellor Guide to the Legal and Shari’a Aspects of Islamic Finance (Chancellor, 1st edn, 2009) 285 and 292–95. 5. The Qur’anic basis of takaful is slender. Verses relevant to guaranty or takaful include 3:37, 3:103 and regarding mutual cooperation (ta’wun) 5:2. Codifying mutual cooperation and assistance in modern national law, the Takaful Act of Malaysia 1984, s 2 defines takaful as ‘a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need, whereby the participants mutually agree to contribute for that purpose’. The Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI), the Arab Gulf counterpart to the IFSB, based in Manama, Bahrain also publishes standards and its Shari’a Standard (SS) No 26 ‘Islamic Insurance’ para 2 defines takaful ‘as an alternative to the conventional concept of insurance that is based on Shari’a concepts of mutuality and cooperation’. 6. Peter Hodgins and Caroline Jaffer, ‘Takaful’ in Craig Nethercott and David Eisenberg (eds), Islamic Finance: Law and Practice (Oxford University Press, 1st edn, 2012) , 271 cite IFSB and AAOIFI standards including the following from the latter (SSNo 26, ibid) ‘payment of contributions as donations and leads to the establishment of an insurance fund that enjoys the status of a legal entity and has independent financial liability. The resources of this fund are used to indemnify any participant who encounters injury … . The fund is managed by either a selected group of policyholders, or a joint stock company that manages the insurance operations and invests the assets of the fund against a specific fee.’ 7. For further comparative analysis, see Hairul Suhaimi Nahar, ‘Insurance vs Takaful: Identical Sides of a Coin?’ (2015) 13(2) Journal of Financial Reporting and Accounting 247. 8. There is an industry phenomenon called re-takaful; however, it does not function precisely as re-insurance and will not be considered here. 9. With the proximate cause of the last global financial crisis (commencing in 2007) being the failure of a US-based insurance company, AIG, followed in rapid succession by banks, triggering a liquidity crisis. 10. As observed at n 4, with gharar and maysir being the most problematic interdictions in relation to risk arbitrage. 11. For an interesting deeper analysis of gharar in connection with takaful, with reference to Knightian uncertainty, see Daniele D’Alvia, ‘(Legal) Uncertainty: Takaful Between English Common Law and Shari’a Law’ (2017) 10 International Review of Law 1. 12. Each takaful participant is simultaneously insurer and insured. A typical term of takaful is one year—for more on the variety of possible schemes: Zubair Hasan, Islamic Banking and Finance: An Integrative Approach (Oxford University Press, 1st edn, 2014) 253 and 263–64. 13. See, respectively, by Scott Morrison, ‘The Upcoming UK Sovereign Sukuk Issue’ (2014) 29(7) Journal of International Banking Law and Regulation 362; and Scott Morrison, ‘The Application of UK Prospectus Rules to Sukuk (Islamic Securities) on the London Stock Exchange’ (2016) 31(4) Journal of International Banking Law and Regulation 237. 14. A body of work has emerged analysing the respective performance of Islamic and conventional banking in times of economic crisis, and some of these findings are pertinent as well to takaful. For example, Habib Ahmed, Mehmet Asutay and Rodney Wilson, Islamic Banking and Financial Crisis: Reputation, Stability and Risk (Edinburgh University Press, 1st edn, 2014) . 15. See n 5. This premise of takaful is similar (apropos of the thesis of this article as will become clear below) to the requirement in English law that a charitable trust must be solely charitable (Charities Act 2011, s 1); Re Resch’s Will Trusts [1969] 1 AC 514. 16. Shariah Advisory Council (SAC) of the Central Bank of Malaysia on 26 January 2016 has reiterated the importance of tabarru’ defining it as a ‘voluntary gift’. IFSB 8 (n 3): ‘In a takaful arrangement the participants contribute a sum of money as a Tabarru commitment into a common fund that will be used to mutually assist the members against a specific type of loss or damage.’ For some of the complexities attendant on the commitment to tabarru: Oliver Agha, ‘Tabarru in Takaful: Helpful Innovation of Unnecessary Complication?’ (2010) 9 UCLA Journal of Islamic and Near Eastern Law 69. 17. A very useful 19th-century codification of Islamic law, written in Ottoman Turkish and translated into Arabic (al-Majallat al-Ahkām al-‘Adalliyah—literally, Journal of Judicial Rules) is available in English as The Mejelle (The Top Press, 1st edn, 2007). The Mejelle Book VII deals with the law of gift; art 833 states, ‘Hibe is to give the owner-ship of property to another without reward.’ Chibli Mallat, Introduction to Middle Eastern Law (Oxford University Press, 1st edn, 2009), compares The Mejelle to a bench book (245). Muhammad Hidayatullah and Arshad Hidayatullah, Mulla’s Principles of Mahomedan Law (NM Tripathi, 19th edn, 1990) ch XI deals with the law of gift, with para 138 stating that a hiba or gift is ‘a transfer of property, made immediately and without any exchange, by one person to another, and accepted by or on behalf of the latter’. 18. IFSB (n 6) para 13 states: ‘The underlying concept/principle for takaful scheme is tabarru’ and ta’awun (mutual assistance) among the takaful participants.’ 19. Except in the case of an industry practice of introducing interest-free loan capital in case of a fund shortfall, as will be further explained below. 20. Hans Visser, Islamic Finance: Principles and Practice (Edward Elgar, 2nd edn, 2013) 131: ‘Insurance premiums are not seen as payments made to reduce insecurity, but as tabarru, voluntary contributions made for the good of group members that suffer mishaps.’ In relation to ta’awun, mutual assistance Visser emphasizes that it is not a purchase, not a sale—citing Abdul Rahim and others, ‘Islamic Takaful: Business Modules, Shariah Concerns, and Proposed Solutions’ (2007) 49(3) Thunderbird International Business Review 371. 21. As adopted, for example, in Ahmad Basri Ibrahim and Ahmad Fadihil Hamdi Mohd Ali, ‘Absolute Assignment in Takaful Industry: Shari’ah Contracts, Issues and Solutions’ (2015) 23 Intellectual Discourse 1, 3. 22. Strictly speaking there is no exact counterpart to the term ‘consideration’ as in English law, in Islamic law, Al-Zuhayli (n 3) 53–54 distinguishes price, value, and debt in relation to sale contracts. 23. For discussion of these options, see D’Alvia (n 11) 11. 24. As set out for instance comprehensively in Al-Zuhayli (n 3) ch XII; Bowstead and Reynolds on Agency (21st edn, 2017) 1-001. 25. Paragon Finance v DB Thakerar and Co [1999] 1 All ER 400, 416. 26. D’Alvia (n 11) 11; Antony Hainsworth, ‘Retakaful, Regulation and Risk: Developing the Islamic Insurance Market in the Uk—Conventional Reinsurance Will Give Way to Retakaful Facilities’ (2009) 24 Journal of International Banking and Financial Law 193, 195. 27. An excellent introduction to the field of Islamic finance, aimed at the practitioner, is Craig Nethercott and David Eisenberg, Islamic Finance: Law and Practice (Oxford University Press, 1st edn, 2012) forthcoming in a new edition in 2019. 28. Paragon Finance (n 25). 29. On the coupling of a trust with a power—Burroughs v Philcox (1840) 5 My & Cr 72. 30. Other formulae could be devised that would allow partial payments to members who had paid part of their tabarru’, or into the estates of those scheme participants who had died before the expiration date. For some methods of calculating the payment: Lukman Ayinde Olorogun, ‘A Proposed Contribution Model for General Islamic Insurance Industry’ (2015) 8(1) International Journal of Islamic and Middle Eastern Finance and Management 114. Alternatively, takaful participants could agree unanimously to terminate the trust under Saunders and Vautier [1841] EWHC J82. 31. Re Weekes’ Settlement [1897] 1 Ch. 289; [1897] 1 WLUK 86. 32. Rather than a dichotomous division into legal and illegal, shari’a assesses actions as falling into one among five categories: haram (forbidden), makruh (sinful, disliked), mubah (allowed, neutral), mustahabb (recommended), and wajib (required, mandatory). 33. Mohammad Hashim Kamali, Shari‘ah Law: An Introduction (Oneworld 2008, 2011 repr) 186, citing ‘Abd al-Qadir’ Awdah (al-Tashri al-Jina’i al-Islami, 115), invokes the Islamic legal maxim that the ‘conduct of reasonable men (or the dictate of reason) alone is of no consequence without the support of a legal text’. As Kamali explains the point ‘No one, therefore, should be deemed a violator because of committing or omitting an act which is not forbidden by the clear provisions of the law.’ Awdah elaborates that ‘In the absence of a clear text which may require affirmative action or abandonment of a particular conduct, the perpetrator or abandoner incurs no responsibility and no punishment can be imposed’ (cited above, 187). 34. [1765] EWHC KB J98 95 ER 807. 35. The name of the company was ‘Sirket-i Hayriye’ that literally means ‘the Auspicious Company’; it was a marine transport company, based in Istanbul—Timur Kuran, ‘The Absence of the Corporation in Islamic Law: Origins and Persistence’ (2005) 53(4) The American Journal of Comparative Law 785, 785. 36. Examples of countries purporting the rule of Islamic law: the Kingdom of Saudi Arabia (art 1 of the 1992 Basic Law); Egypt’s art 2—‘The Principles of the Islamic sharī’a are the Chief Source of Egyptian legislation’; Afghanistan (art 3); Iran (arts 2–4); Pakistan (art 227); Qatar (art e 1); and Yemen (art 3). See Clark B Lombardi, ‘Constitutional Provisions Making Sharia “A” or “The” Chief Source of Legislation: Where Did They Come from? What Do They Mean? Do They Matter?’ (2013) 28(3) American University International Law Review 733. 37. See n 6. However, in an illustration of the type of objection considered here, the use of a company for takaful has attracted criticism, as in Kamaruzaman Noordin and others, ‘The Commercialisation of Modern Islamic Insurance Providers: A Study of Takaful Business Frameworks in Malaysia’ (2014) 2(1) International Journal of Nusantara Islam 1. 38. Scott Morrison, Law of Sukuk: Shari’a Compliant Securities (Sweet and Maxwell 2017). 39. ch 8(VI), (n 39). 40. Hidayatullah and Hidayatullah (n 17)—ch XII deals with the waqf. At 178, quoting the (Indian) Wakf Act 1954, s 2(1): ‘Objects of Wakf.’ The purpose for which a wakf may be created must be the one recognised by the Mahomedan law as ‘religious, pious, or charitable.’ Under s 3: ‘A wakf may also be created in favour of the settlor’s family, children and descendants.’ Hybrid structures combining waqf, wakala, and mudaraba are also current in the industry— Hasan (n 12) 266–69. 41. Wakf Act 1954, s 2(1). 42. For example, in the Mauritian Waqf Act 1941—see Scott Morrison, ‘The Social and Legislative History of the Islamic Trust (waqf) in Mauritius’ 42(1) (2016) Commonwealth Law Bulletin 59. 43. Fida Hussain, The Musalman Law of Wakf (Central Indian Printing, 1st edn, 1939) 127, quotes the 1922 Privy Council case Vidya Varuti v Balyswami: ‘Mahomedan Law Relating to Wakfs Differs Fundamentally from the English Law … Neither the Mutawalli nor the Sajjadanashin has Any Right in the Property Belonging to the Wakf, the Property is not Vested in him and he is not a Trustee in the Technical Sense.’ 44. Wakf Act 1954, s 3. 45. Charities Act 2011, s 3(2) allows for religions with one, multiple, or no gods. Neville Estates Ltd v Madden [1962] Ch. 832; [1961] 3 WLR 999; [1961] 3 All ER 769; [1961] 7 WLUK 117; (1961) 105 SJ 806 allows all deistic faiths. 46. Under the common law rules and the Perpetuities and Accumulations Act 2009. 47. SA Kader, The Law of Wakfs: an analytical and critical study (Eastern Law House, 2nd edn, 2008) 5: ‘Two Conditions are Necessary for the Validity of a Wakf Under Sunni or Hanafi Law Viz:—1. A Wakf Shall be Certain, Absolute and Unconditional. 2. A Wakf Shall be Perpetual.’ 48. S Morrison (n 42) . 49. Monica M Gaudioisi, ‘The Influence of the Islamic Law of Waqf on the Development of the Trust in England: The Case of Merton College’ (1988) 136 University of Pennsylvania Law Review 1232; in the article she examines the 1264 Statutes of Merton College. Other articles on this subject include Henry Cattan, ‘The Law of Waqf’ in Law in the Middle East (Brill, 1st edn, 1955) 203 and 212–18; Ann Van Thomas, ‘Note on the Origin of Uses and Trusts’ (1949) 3 Southwestern Law Journal 162. 50. EY, Global Takaful Insights, annual publication[AQ12]; research on Cobalt’s webpage (n 1); Tahani Coolen Maturi, ‘Islamic Insurance (Takaful): Demand and Supply in the UK’ (2013) 6(2) International Journal of Islamic and Middle Eastern Finance and Management 87; Marc Jones, ‘The Next Step’ (2008) 109(6) Best’s Review 145; Mohamed Sherif and Sadia Hussain, ‘Family Takaful in Developing Countries: The Case of Middle East and North Africa (MENA)’ (2017) 10(3) International Journal of Islamic and Middle Eastern Finance and Management 371. © The Author(s) (2019). Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)