An important court ruling has clarified the law in relation to the principle that trustees exercising their powers must do so for a "proper purpose".
This update covers the legal position in England and Wales.
The case of Grand View Private Trust Co Ltd v Wen-Young Wong concerned a trust established under the law of Bermuda. The trust was established for the benefit of the children and other descendants of the trust's founders. On the same day, the founders had also established a separate "purpose" trust, ie one which did not have specified individuals as beneficiaries, but which was established to further a mix of charitable and other purposes. The trust's founders subsequently had a change of plan regarding retaining their personal shareholdings in their business empire. The change of plan meant that the shareholdings would pass to the founders' children on the death of the founders. The founders therefore took the view that it was no longer necessary to have a trust to benefit their children and other descendants. The trust contained a wide power for the trustee to add and remove beneficiaries. In accordance with the founders' wishes, the trustee sought to exercise this power to remove the founders' children and other descendants as beneficiaries and effectively substitute the purpose trust as the beneficiary.
The Privy Council held that the trustee had used the power to appoint and remove beneficiaries for an improper purpose. On a literal reading of the power there were no limits on who could be appointed or removed as a beneficiary. However, having considered the wording of the trust as a whole (in particular its focus on the descendants of the trust's founders as beneficiaries) and the circumstances of its establishment (ie that the Founders had established two trusts simultaneously, one to benefit their descendants and one to further charitable and other purposes) the Privy Council concluded that the proper purpose of the power to add or remove beneficiaries was to further the interests of one or more of the original beneficiaries.
Although Privy Council decisions are not technically binding on the English courts, the Privy Council judges are UK Supreme Court judges, so Privy Council decisions are indicative of how the Supreme Court would be likely to rule, and are likely to be followed in the English courts.
It is common for pension scheme trust deeds and rules to contain broadly drafted powers. This case illustrates that when considering whether a power under a trust has been properly exercised, the courts will consider not only the literal wording of the power, but also the purpose for which it was conferred. This means that an act which, on a literal reading, falls within the scope of the power, could be open to legal challenge if it is used for a purpose different from that for which the power was intended. In a pensions context, this could be particularly key when considering the use of powers to deal with surpluses.
In this case the parties were agreed that the purported exercise of the power would be void if the power had been exercised for an improper purpose. This meant that the Privy Council expressly did not rule on the issue whether the exercise of a trust power for an improper purpose would be automatically void or simply voidable. (If the exercise of a power is voidable rather than void, the exercise will stand unless set aside by the courts.)