Saunders v Vautier in Guernsey
A recent Guernsey Court of Appeal decision, Molard International (PTC) Limited v Pullborough Int. Corp v Rusnano Capital AG (in liquidation) 2019 GCA077, looked at when a discretionary trust can be terminated by its beneficiaries. The case provides helpful clarification as to the relationship between section 53 of the Trusts (Guernsey) Law 2007 (the 2007 Law) and the so-called ‘rule’ in Saunders v Vautier arising in English Law which requires the class of beneficiaries to be closed before a trust can be terminated.
Under s 53(3) of the 2007 Law, beneficiaries are able to require a trustee to terminate the trust and distribute the trust property to the beneficiaries ‘where all beneficiaries are in existence and ascertained’ and where none is a minor or under a disability. This is generally regarded as the codification of the rule in Saunders v Vautier.
The facts of the case will be well-known to our readership. As the sole beneficiary named in the trust instrument, Rusnano Capital AG brought an application seeking termination of the trust and a distribution of the trust assets to it. The respondents, who were the trustee and enforcer, resisted the application on the basis that in the trust instrument there was a power to add beneficiaries which meant that the class was not closed. The respondents cited the rule in Saunders v Vautier in support of their position.
At first instance, the court had held that Rusnano could terminate the trust since it was the sole beneficiary and the power to add beneficiaries did not change its entitlement to do so. The court construed section 53(3) as drawing a distinction between the current beneficiaries under the trust and those who are only potential objects of a power to add beneficiaries, the latter not being a beneficiary unless or until that power is exercised in their favour. The court held that at the relevant time, Rusnano was the sole beneficiary and entitled to terminate the trust under section 53(3).
The Court of Appeal upheld the lower court’s decision stating that the correct approach was to give effect to the statutory regime in Guernsey and that authorities from other jurisdictions relating to Saunders v Vautier are not necessarily relevant. It agreed that the correct construction of section 53(3) was that ‘all the beneficiaries’ should be read to mean all existing beneficiaries and if the intention had been to include potential beneficiaries, the provision would have included wording to the effect. The Court of Appeal acknowledged the risk that its decision in this case might open the floodgates to similar applications by charities who are beneficiaries of the so-called ‘Red Cross Trusts’ where a charity is the only named beneficiary but it is intended that the trustee will exercise its power to add further beneficiaries. However, the Court of Appeal commented that such a situation was unlikely to arise because the court in Guernsey has a discretion arising under section 53 (4) of the 2007 Law to override the right of termination and prevent it in appropriate circumstances. When that discretion will be exercised to prevent termination is not clear, and for now there is at least a possibility that default charities of Guernsey trusts might seek to invoke section 53(3) to seize the trust assets in reliance on this decision.
For Channel Islands trustees (as the Jersey law follows suit) who are concerned about the impact of this decision, they might consider adding further beneficiaries or amend the relevant trust provisions to ensure that the class of beneficiaries is defined as including ‘issue’.
It remains to be seen whether the Court of Appeal decision in this case will affect how the English courts apply the rule in Saunders v Vautier. Where Saunders v Vautier might previously have prevented termination of a trust where there is a power within the trust document to add beneficiaries, if a clear Letter of Wishes exists alongside the trust which confirms the identity of the intended beneficiaries, and all those persons named in the Letter are adult and in agreement with termination, submissions might be made to an English court that the trust can be terminated and those submissions might be successful. Moreover, if the court is left with a discretion whether or not to order a termination of a trust, the question arises as to whether it is likely to do so where either the Settlor is still alive and opposes or it was clearly intended that the trust would endure into the future.