The law firm examines a recent major case in the Channel Islands concerning what is called the role of "protector" in trust law.

This article drills into the detail of an important person relating to trust law: the protector. A recent legal case in Guernsey raises fresh questions around this role. The article here is by Dawn Goodman and Emma McCall of international law firm Withers. Goodman is the head of international trust litigation and a partner in the contentious trust and succession group, and McCall is an associate in that group.

A protector is commonly regarded as someone to watch over the trustee and ultimately prevent any wrongdoing. But what happens when the protector stops protecting, or – even worse – becomes the person from whom the beneficiaries need protecting?

A number of cases around the world have involved the removal of mad and bad protectors where, for example, they have pursued claims against the trust (Re VR Family Trust, Centre Trustees CI Ltd v Van Rooyen [2009] JRC 109) or made off with significant trust assets (Re The Freiburg Trusts [2004] JRC 056). The Royal Court of Guernsey recently handed down judgment in In the matter of the K Trust demonstrating that even when circumstances are less extreme, a protector who clings to office for too long can be removed.

The latest case on protectors - In the matter of the K Trust
Eleven (of the 14) adult beneficiaries of the K Trust issued an application seeking the removal of the protector who had been in place from the beginning (the "removal application"). The protector's response was to bring her own application asking whether in the circumstances she could legitimately retire from her position as protector without appointing her successor (the "retirement application").  

The Guernsey Court (like the Jersey Court, as confirmed in the matter of the A Trust [2012] JRC 169A) clarified that it will apply similar considerations to the removal of protectors as to the removal of trustees, creating a greater likelihood of an industry standard worldwide. As established in Letterstedt v Broers (1883-84) LR 9 App Cas 371, the deputy bailiff found that the key principles to be considered are the welfare of the beneficiaries and the competent administration of the trust in their favour.

Four years after the death of the settlor of the K Trust, the widow (who was the primary beneficiary) formally requested the protector to step down; this was rejected.  

Although the protector acknowledged that the initially cordial relations had ceased and she had lost her relationship with the widow, she considered that only she was privy to the settlor's wishes and accordingly she had to continue as protector. The widow ceased attending trustee/beneficiary meetings because she felt marginalised by the protector.

Subsequently, the widow and three other beneficiaries (who the deputy bailiff considered to be the "chefs de famille" of the various family branches) requested the trustee to take steps to terminate the trust. The protector was not supportive; she disagreed with the trustee and its advisors as to how potential liabilities had been assessed and considered that the K Trust needed to continue to hold assets as a contingency against whatever liability might subsequently arise. All the adult beneficiaries made a formal and final request that she retire.

Nine years after she was first asked to retire and with the trustee confirming that due to the breakdown of relationships the trust had become unworkable, the Royal Court granted the removal application.

It is now clear that if a protector is not working in harmony with trustees and beneficiaries and the protector is at least partly responsible for such a state of affairs, the protector is susceptible to being removed.

Being handpicked by the settlor to be protector does not prevent a protector being removed. Neither did the Royal Court consider that such a protector should only be removed in exceptional circumstances (as was suggested in the Isle of Man case, Re Papadimitriou [2004] WTLR 1141).

What should a protector do when asked to retire?
Where a protector is requested to retire by all or the majority of beneficiaries, the protector would be well advised to respond without delay and to negotiate a prompt exit.

As the deputy bailiff stated in the K Trust: "History is littered with people who have hung on to office for longer than was wise and whose reputations have suffered as a result…I have reached the conclusion that [the protector] should have realised much earlier than she apparently did how untenable her position had become."

What if the protector is concerned that he/ she is being asked to retire to facilitate a breach of trust?

In a rare case, it might be that the protector asked to step down is concerned that to do so would be a breach of trust. In such a case, a protector should be cautious and may – as occurred in this case – wish to apply to the Court for guidance.

In the K Trust such an application was not, in fact, necessary. The Royal Court confirmed that the protector could vacate office without being obliged to name a successor protector (such action was not precluded by the trust deed and she would not be at risk of action for breach of duty in so doing) but while granting the relief she sought, also ordered her removal.

What happens to the protector's documents?
If a protector agrees to provide all reasonable assistance and all relevant documents to their successor, the K Trust decision indicates that the protector may be permitted to retain copies.

Given the possibility for there to be concerns about the inherent dangers in leaving sensitive and confidential documents in the possession/control of a protector ceasing to hold office, it may be wise to stipulate in the trust deed that (other than documents required for regulatory purposes) protectors are provided with documents solely to enable them to fulfil their function and must return them and all copies to the trustee when they cease to hold office. Further, the trustee could stipulate that any documents it provides to the protector belong to the trustee and must be returned.

Does the protector owe an ongoing duty of confidentiality?
The Guernsey Court confirmed the obligation of confidentiality of a fiduciary even when they have ceased to act in their role, and whatever the extent of the breakdown of relations with the beneficiaries.  

This should be borne in mind by any retiring (or removed) trustee, protector or other fiduciary. In the event of a threat of disclosure of such confidential information, a former fiduciary can be restrained by injunction.

Is the protector entitled to an express indemnity?
The K Trust decision clarifies that if the protector is not afforded an indemnity in the trust deed or by the law of the jurisdiction governing the trust (which generally provides for the protector to be reimbursed proper expenses), the protector cannot expect to obtain the protection of an express indemnity by court order.

Although the position of a protector is similar in some respects to that of a trustee, a protector is not in an analogous situation to argue for indemnities because he/ she never holds trust assets. Whilst it is conceivable that a trustee, as an asset holder, may have become exposed to liabilities (such as tax) which may descend on them after they have stepped down from their role, this does not apply to a protector. So the rationale for ongoing indemnities commonly given to an outgoing trustee does not apply to a protector.

The deputy bailiff accordingly refused to grant the protector either an open-ended blanket indemnity (to which she would not have been entitled in any event) or a narrower indemnity in respect of possible liabilities to which the protector submitted she might be exposed. He did not rule out the possibility of the Court granting an indemnity in an appropriate case.  

Warning to protectors who wish to cling on
The message is clear: even where – as here – the protector is appointed by the settlor, the protector cannot consider themselves enshrined in that role. If the protector remaining in place is genuinely impeding the administration of the trust, trustees and beneficiaries need not continue to struggle with an untenable situation: they can ask the court to remove the protector who has stopped protecting.