T he role of the enforcer in relation to purpose trusts (known as STAR trusts in the Cayman islands) is a concept which is likely to be very familiar to trust practitioners working in offshore financial centres, but less so to those working onshore. The reason being, that enforcers are connected with non-charitable purpose trusts and, so far as English law is concerned, this concept is largely unrecognised, save for a few isolated cases. That being the case, no doubt some purist English lawyers might find it strange that anyone might attempt to deal with the role of protectors and enforcers in the same article. However, from the point of view of clients and their professional advisers who are regularly involved in setting up trust structures and professional trust companies which act as trustees it is suggested that, in a practical sense, the roles of protector and enforcer may often require similar considerations. Both roles generally exist to ensure that the trust operates in accordance with the constitutive documents and in the manner intended by the settlor and both roles usually have the potential to exercise substantial influence over the operation of the trust in question. Furthermore, both roles are likely to need to be filled by persons who have the confidence of the settlor (at least during the settlor’s lifetime).

Protectors fundamentally derive their powers from the terms of the trust instrument. There is considerable case law and academic authority on the classification of powers¹ and indeed as to their application in relation to protectors². Without wishing to oversimplify the position, in so far as the issues have been before the Courts concerning the powers vested in protectors, the question has largely turned on whether the powers in question are beneficial powers or fiduciary powers³. In the case where the powers are beneficial powers, then the donee of the power is entitled to exercise the power selfishly and in his own interests if he so wishes. On the other hand, a fiduciary power carries with it an obligation to act in good faith in the interests of the beneficiaries as a whole and a duty to consider, from time to time, whether or not to exercise the power. That said, even where a power is clearly a fiduciary power, there is some debate as to what the extent of those duties are. It can certainly be argued that the duties that might be placed on an unpaid friend or relative of the settlor occupying the role of protector are not the same as would be applied to a company or an individual offering professional services as a protector⁴.

The powers which may be vested in protectors are many and varied and range from the power to appoint and remove trustees, the power of veto over distributions of capital and income, a power of veto over the appointment and removal of beneficiaries, to powers to amend or vary the trust instrument or to veto such amendments and variations. It is beyond the scope of this article to consider the issues relating to the exercise of all such powers which may be vested in protectors, but it is possible to make some general comments in relation to them.

It is quite possible that some powers vested in a protector by a single trust instrument may be fiduciary and others beneficial⁵. Indeed it is perfectly possible for a trust instrument to state whether certain powers vested in a protector are to be exercised by the protector beneficially or in a fiduciary capacity. That said, it seems questionable whether a provision in a trust instrument stating that a protector’s powers are all to be exercised beneficially, would be enforceable if the powers in question were vested in an independent protector who had no beneficial interest in the trust and were plainly to be exercised for the benefit of the beneficiaries as a whole⁶. Provisions in the trust instrument which are likely to be indicative of a fiduciary duty being imposed upon the protector are provisions providing for (i) the appointment of a successor protector, (ii) the remuneration of the protector and power for the protector to be able to retain commissions and fees, and (iii) for the protector to release or suspend their needthe requirement for his consent to be obtained⁷. Also of relevance will be whether the protector is (or can be) a beneficiary of the trust.

Interestingly, it has been held that, if the powers of a protector are of a fiduciary nature, then a power to appoint a protector is also fiduciary and therefore must be exercised in good faith in the interests of the beneficiaries⁸.

As mentioned above, so far as English law is concerned, the concept of non-charitable purpose trusts (hereinafter referred to as ‘purpose trusts’) is largely unrecognised, save for a few isolated cases. Examples of the classes of cases where English law purpose trusts have been held to be valid are trusts for the erection or maintenance of monuments or graves⁹, for the saying of masses¹⁰ and in certain circumstances unincorporated associations¹¹.

These exceptions aside, the generally accepted rule of English law is that, in order for a trust to be valid (excepting charitable trusts) the trust must have an ascertainable beneficiary in whose favour performance of the trust may be decreed¹². As Roxburgh J stated in Re Astor’s Settlement Trusts there is the problem with non-charitable purpose trusts: ‘In theory, because having regard to the historical origins of equity it is difficult to visualize the growth of equitable obligations which nobody can enforce, and in practice, because it is not possible to contemplate with equanimity the creation of large funds devoted to non-charitable purposes which no court and no department of state can control, or in the case of maladministration reform.¹³’ Charitable trusts are an exception to this rule, the rationale being that they are enforceable by the Attorney-General¹⁴.

Recent mainstream English judicial decisions have, by and large, maintained the view that there is a clear principle against purpose trusts and that the few exceptions to the principle are anomalies¹⁵. On the other hand academic views have ranged from a general position of support of the current judicial position, through to the view that there is no general principle against purpose trusts in English law¹⁶. Certainly there are examples of relatively recent cases, such as Re Denley¹⁷, where the Courts have taken a very liberal approach in relation to beneficiary principle and a recent contrary case is not without some issues of its own¹⁸.

It has also been argued that Quistclose¹⁹trusts are examples of purpose trusts²⁰. However, this debate seems to have been resolved by the judgement of Lord Millett in Twinsectra v Yardley²¹, who states that a Quistclose trust is nothing more than a resulting trust for the lender pending distribution for agreed purposes by the borrower²².

It may be argued that the current law of purpose trusts in England cannot be taken any further forward than as formulated in Re Denley without statutory intervention. This essentially means that, in the so-called ‘exception’ purpose trust cases, there are always persons who can be identified as having ‘an interest’ in the trust, which allows them to apply to the Court to enforce the trust if necessary.

Even if purpose trusts are accepted as being valid as a matter of English law, it would seem that the description of the purpose must be sufficiently certain²³ and the trust must be administratively workable²⁴. Likewise, if the trust is pointless, harmful or illegal then the trust is likely to fail for being contrary to public policy²⁵. Any purpose trust would also need to comply with the law relating to perpetuity²⁶.

However, the preponderance of academic authority tends to the view that the problem with purpose trusts as a matter of English law, is not one of their essential validity, but a lack of someone to enforce them; in the same way as the Attorney-General is available to enforce a charitable trust and a beneficiary can enforce a trust of which she is a beneficiary²⁷. As Lord Wilberforce affirmed in McPhail v Doulton²⁸, a trust should be upheld if there is sufficient practical certainty in its definition for it to be carried out, if necessary with the administrative assistance of the Court.

Numerous offshore jurisdictions, including Jersey, Guernsey, the Isle of Man, Bermuda, Cyprus, the British Virgin Islands, the Bahamas and the Cayman Islands, have enacted legislation to permit the creation of purpose trusts. It is beyond the scope of this article to consider the specific legislation relating to purpose trusts for all these jurisdictions, however some general points can again be made.

It is tempting to assume that the legislation permitting the creation of purpose trusts in the various offshore jurisdictions will all be more or less the same and, as between some jurisdictions, this is certainly the case. However, as between other jurisdictions the approach to the legislation is noticeably quite different. Whilst all the jurisdictions considered above effectively provide for some form of ‘enforcer’²⁹, it is not always the case that the enforcer need be named or appointed by a mechanism set out in the trust instrument³⁰. Some jurisdictions are clear in their legislation that mixed trusts for beneficiaries and non-charitable purposes are possible, whereas in others the position is less clear³¹. Likewise, the statutory rights and duties of the enforcer in relation to his functions as enforcer can vary considerably between the different jurisdictions.

As to the question of enforcement of purpose trusts which have been validly established in the jurisdictions mentioned above before the English Courts, it seems likely that such trusts would be recognised under the Recognition of Trusts Act 1987, incorporating the Hague Trusts Convention³².

It is by no means clear what the true nature of an enforcer’s office is but it is suggested that it is likely to carry with it duties of a fiduciary nature. The office of enforcer could not sensibly be regarded as giving the enforcer some unascertained beneficial interest in the trust assets from which her right to enforce the trust emerges (which might arguably be the case if direct parallels were made with a beneficiary’s right of enforcement in a trust for beneficiaries). If it did this could give rise to all sorts of unintended consequences for the enforcer and, perhaps, the settlor. Furthermore, there is clearly no difficulty with beneficiaries (with whom the enforcer’s position could be equated in relation to the enforcement of the trust) holding powers which they must exercise as fiduciaries³³.

In some jurisdictions, attempts have been made to put the question regarding the nature of the enforcer’s duty to rest by specifically stating in the relevant legislation that the enforcer’s duty is to be ‘fiduciary.³⁴’ However, defining the duties of the enforcer as ‘fiduciary’ in some ways raises more problems than it solves, as the concept is generally considered in the context of owing a duty to a person, which clearly does not apply in the case of a purpose trust³⁵. Given that a charitable trust is a form of purpose trust, arguably the duties of the enforcer, whether properly described as fiduciary or not, might be ascertained by reference to the duties which apply to trustees of charitable trusts. If so, and subject to the laws of the jurisdiction in question, this might require the enforcer to ensure that the trustees carry out the trust in accordance with statute and the trust instrument and promote the purposes of the trust³⁶. Presumably, also by analogy with the position of fiduciaries generally, the office of enforcer also carries with it an inherent duty to act in good faith and not to place itself in a position where its office and personal interests conflict³⁷. Doubtless a similar result could be arrived at by making an analogy with the fiduciary duties owed by trustees of a trust for beneficiaries to the beneficiaries of that trust. Also, by analogy with the obligations on charitable trustees, where the law of the relevant jurisdiction provides for it, there may also be a duty on the enforcer, when the main purpose of the trust cannot be accomplished without departing from the terms of the trust, to apply to the Court for an order in relation to a cy près-type scheme if the trustees are not willing to do so³⁸.

Following on from this, a further question arises as to whether an enforcer’s duty is generally active or passive. At the one extreme, one might argue that the enforcer is under a duty to continually monitor the activities of the trustees of the trust, whereas at the other, the argument might be that the enforcer need only react if and when he is alerted to some activity by the trustees which requires intervention. By analogy with the enforcement role of a beneficiary of a trust for beneficiaries, the role of enforcer might be entirely passive, as a beneficiary is not generally under an obligation to enforce the trust in which he has an interest. However, given that the office of the enforcer may well be fiduciary (or at least involve statutory duties of a fiduciary-like nature) it is suggested that the role is unlikely to be entirely passive and some degree of enquiry into the actions of the trustees will be placed on the enforcer³⁹. No doubt, in practice, much will turn on the interpretation of the relevant trust instrument and the legislation relating to purpose trusts of the jurisdiction concerned. It will be interesting for practitioners to see how the law develops in this area.

It would clearly be inappropriate to draw clear parallels between the role of a protector to a trust for beneficiaries and an enforcer to a purpose trust, when it comes to their obligations in managing conflicts of interest. However, in the circumstances where an enforcer is occupying a fiduciary position and perhaps even if she is not, it seems obvious that, in the same way as with a protector who occupies a fiduciary position, the enforcer will need to be ‘alive’ to the possibility of conflicts of interest⁴⁰.

The recent Jersey case of Centre Trustees⁴¹, although a fairly extreme example, highlighted the problems that can potentially arise with the office of protector, particularly when the protector also holds direct or indirect interests in businesses in which the trust is also invested. The following principles can be extracted from the judgement.

a

When a conflict of interest first comes to light, it is for the protector to disclose the conflict to the trustees and to the beneficiaries (in the case of a fixed trust) or to the principal beneficiaries if practicable (in the case of a discretionary trust).

b

How that conflict of interest is managed by the protector will depend upon the protector’s powers and the nature of the conflict and how pervasive its effect. The protector may be able to remain in office if it is in the interests of the beneficiaries for him to do so and if he honestly and reasonably believes that he can discharge his duties in the interests of the beneficiaries. If so he must, like trustees in a position of conflict, run the risk of having to justify the exercise of his powers in hostile litigation and satisfy the Court that any decision taken was not influenced by the conflict. If not, it is his duty is to resign and if he fails to do so it is the duty of the trustees to apply to Court for his removal.

c

Where the protector is actively pursuing claims against the assets of the trust of which she is a protector, the protector is under a clear duty to resign from the moment it is contemplated that claims would be advanced by her against the trust.

d

If the protector also holds a power to appoint a new protector and there is no provision in the trust instrument for the resignation of the person holding this power, he should formally acknowledge that the conflict requires his resignation and co-operate with the trustees in the appointment of a successor protector and (if required) an application to the Court for his replacement.

A further example of a case where the position of a protector was potentially compromised is the Jersey case of Re X’s Settlement⁴². This case concerned an application for an order by the trustees that they be entitled to disclose information concerning the trust to a third party, which the protector was resisting. The actions of the protector, although apparently well intentioned, were seemingly not well received by the Court and the Court described the protector’s activities as coming close to ‘intermeddling.’

It would be inappropriate to suggest that, in relation to purpose trusts, the references to the ‘protector’ in the principles arising from Centre Trustees highlighted above concerning conflicts of interest could simply be replaced by references to the ‘enforcer.’ This is so, not least, because a purpose trust has no beneficiaries whom the enforcer needs to consider. However, it is submitted that some of the principles are of relevance to the position of an enforcer and, even more so, when the enforcer has powers vested in her in addition to her duties relating purely to enforcing the trust (which is not uncommon). Equally well, in the case of a mixed trust for both purposes and beneficiaries, the principles arising from Centre Trustee may be highly relevant to the enforcer’s office.

Furthermore, one might legitimately argue that, even in the case of a pure purpose trust, the duty placed on an enforcer to avoid conflicts of interest should be at least equal to, and possibly even greater than, that placed on a protector in a fiduciary position to a trust purely for beneficiaries, for the following reason. In the case of a trust for beneficiaries there is, at least, the possibility that the beneficiaries would be able to seek relief from the Court to prevent the activities of an errant protector, if the trustees were not willing to take action against the protector themselves. In the case of a ‘pure’ purpose trust, as there are no beneficiaries, the only person available to ensure that the trust is administered properly by the trustees is the enforcer. Thus one might argue, that an enforcer is under duty to apply the highest levels of probity to his office so as to avoid conflicts of interest.

Plainly the legal issues concerning the ‘pure’ offices of protector and enforcer are quite different. However an enforcer of a ‘pure’ purpose trust may also hold powers (such as those commonly vested in protectors) in addition to her duties relating purely to enforcing the trust. In these circumstances, it is submitted that similar considerations will apply as between the duties of enforcers and protectors, at least in relation to the non-enforcing powers vested in the enforcer. Likewise, where an enforcer is acting in a fiduciary capacity in relation to the enforcement of a purpose trust, as with a protector who is acting in a fiduciary capacity in relation to a trust for beneficiaries, it seems likely that there will be a requirement to act in good faith in the interests of the objects of the trust as a whole⁴³ and to avoid conflicts of interest.

This is particularly so in the case of a mixed trust of purposes and beneficiaries where powers of appointment or veto (over the trustees’ power of appointment) which directly concern the interests of the beneficiaries are vested in the enforcer. The enforcer will need to exercise a considerable degree of care in carrying out his duties and obligations to ensure that they are carried out in accordance with the relevant trust instrument and the proper law of the trust.

It will be apparent from the above comments that, in the case of some trusts at least, there is the potential for the issues facing protectors and enforcers to become quite complex. If and when complexities do arise, it is likely to be very unhelpful if the person occupying the position of a protector or enforcer is also potentially subject to a conflict of interest. It seems unassailable that the best way to avoid a conflict of interest as a protector or enforcer is not to accept such office at the outset if there is a possibility that a conflict of interest could arise in the future.

As a result of recent events in the financial markets and the current general economic situation, it seems all but inevitable that there will be even greater scrutiny by tax authorities and financial regulators as to how financial structures operate with an ‘eye’ to recovering revenue and reducing risk respectively. In such a brave new world it seems unlikely that there will be much sympathy from such bodies towards persons holding the offices of trustee, protector and enforcer (and those whose interests they are seeking to protect) where best practice is not routinely applied to such offices. Such considerations, especially in relation to the reduction of risk for companies, have given rise to the significant increase in the number of non-executive directors being appointed to the boards of companies. It is suggested that, in such an environment, settlors, their advisors and professional trust companies should, where appropriate, make best use of companies and other organisations which specialise in the provision of the services of protectors and enforcers, which are also independent of the trustees and are not involved in the day-to-day dealing of the settlor’s or beneficiaries’ affairs. In so doing, the issues facing persons holding such offices should be dealt with in the most professional manner possible, with a full appreciation of the issues concerned, whilst at the same time avoiding any possibility of a conflict of interest.

Stuart Pryke TEP is an English lawyer and Principal of Fiduciary Legal, London and a director of Fiduciary Protector Limited, Jersey, Channel Islands.