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Not guaranteed: departing trustees' rights of retention

Posted on 06 November 2017 by Emilia Piskorz

Not guaranteed: departing trustees' rights of retention

A recent judgment handed down in Bermuda may now call into question the use of a trustee indemnity for an outgoing trustee both in Bermuda, other offshore jurisdictions and England.

Butterfield Trust (Bermuda) Limited ("Butterfield") had been removed as trustee of two trusts and replaced by Meritus Trust Company ("Meritus") in the context of Butterfield facing a potential claim in respect of its management and administration of the trusts. Butterfield had therefore refused to provide to Meritus copies of relevant trust documents and to transfer to Mertius the assets of the trusts. It did so on the grounds that Butterfield was entitled to retain sufficient trust assets in order to enforce its right to an indemnity as an outgoing trustee in relation to the defence of the threatened claim against it. It estimated that the costs of the defence of this claim, if brought, would be circa $5 million.

The Bermudan Court ordered the immediate transfer of the copies of the relevant trust documents and the assets of the two trusts but considered Butterfield's indemnity and whether this allowed Butterfield to hold on to any of the trusts' assets.

The Court first looked at the Bermudan Trustee Act 1975 ("Act") and it found that it was clear from the Act that trust property automatically vests in a new trustee and that the Act provides for no right of retention unless there is something contrary in the deed removing the old trustee and appointing the new trustee. Unfortunately for Butterfield no such clause in the relevant deeds allowed for Butterfield to retain any of the trusts' assets.

The Court then considered the relevant body of case law in relation to trustees' indemnity (including a number of English cases) and found that the authority in these cases provides trustees with an equitable lien. However, this lien does not entitle the trustee to a right of retention but only the right to ensure that the new trustee does not take steps that will destroy, diminish or jeopardise the old trustee's right of security. There was nothing in relevant textbooks analysed by the Court which assisted Butterfield in providing a contrary view.

Notably, this interpretation of a former trustee's indemnity and the limited rights this provides has application not just in Bahamas but also in the Caymans, BVI and England where the relevant statutory provisions are similar. It should be noted that relevant statutory provisions in Guernsey and Jersey (Article 34(2) of the Trusts (Jersey) Law 1984 and Section 43(1)(b) of the Trusts (Guernsey Law 2007)) provide greater protection as both provisions entitle an outgoing trustee to "reasonable security".

An outgoing trustee should be wary on an indemnity that only provides an equitable lien as if a new trustee or successor trustees are based in difficult and remote jurisdictions, enforcement of an indemnity on this basis may be very difficult or even impossible. As such, trustees should ensure that they have a contractual right to an indemnity in their deed of removal which gives them the right of retention.