Bermuda Court of Appeal clarifies trustees’ powers of amendment: no substratum rule

11/05/20

The Court of Appeal of Bermuda (Clarke, President, Smellie and Subair Williams JA) has handed down an important judgment clarifying the scope of a trustee’s powers of amendment and the doctrine of ‘fraud upon a power’.

In Grand View Private Trust Company v Wong, former individual beneficiaries of a substantial private discretionary trust sought to a challenge a decision by the trustee in 2005 to add a perpetual purpose trust (Wang Family Trust) as a new beneficiary to the trust and to transfer the whole of the trust assets, valued at in excess of US$560 million, to it. The beneficiaries as originally defined in the trust were the children and remoter issue of the Wang brothers (founders of the Formosa Plastics Group, a Taiwanese conglomerate), subject to the exercise of the powers of addition and removal conferred on the Trustees.

On an application for summary judgment, the former beneficiaries argued that the change of beneficiaries and transfer of assets was void because, they argued, replacement of individual discretionary and default beneficiaries combined with the resettlement of trust assets for the benefit of a perpetual purpose trust were transactions beyond the scope of the trustee’s powers and/or an instance of ‘fraud upon a power’. In essence the former beneficiaries argued that it is a fundamental principle of the law of trusts that discretionary powers of amendment, even when stated to be uncontrolled and absolute, cannot be used to change or alter the “substratum” of the trust. This rule had, they argued, been breached because a private 100 year trust had allegedly been transmogrified into a perpetual purpose trust from which the family could never benefit.

Rejecting the former beneficiaries’ arguments and reversing the decision of the Bermuda Supreme Court, the Court of Appeal held that there was no distinct rule of law prohibiting powers of amendment from being exercised in a manner which alters the ‘substratum’ of a trust. Rather, the key questions are (i) whether the exercise of the power is within the terms of the trust instrument; (ii) whether the trustee has given adequate deliberation to the exercise of the power; and (iii) whether the power has been used for an improper purpose.

Applying those tests to the claim, it was held that the trustee had acted lawfully. It had been given a widely-drawn power to enable it to take account of changing circumstances, which it had exercised consistently with the settlors’ wishes. There was no presumption that the power to add or exclude beneficiaries had to be used in the interests of the existing beneficiaries. Although the existing beneficiaries were children and descendants of the Wang brothers, that was not an immutable feature of the trust. In the circumstances, the trustee had acted within the scope of its powers and for a proper purpose.

The judgment is here.