Trustee indemnities: secure at all costs?
Meritus Trust Co Ltd v Butterfield Trust (Bermuda) Ltd [13.10.17]
It is well recognised that a trustee has a right to retain trust assets from a beneficiary in order to meet proper trust expenses and future contingent liabilities. This provides an important protection for a trustee who is facing a claim for breach of trust as well as for the trustee’s liability insurers.
Less certain, however, is an outgoing trustee’s right of retention as against an incoming trustee: and the availability of such a right will depend on the law of the jurisdiction where the trust is administered. English authority on this issue has been equivocal, Cayman authority has been in favour of the right and there is some Australian authority against such a right. The Supreme Court of Bermuda recently had the opportunity to consider the issue as a matter of Bermuda law.
In Meritus Trust Co Ltd v Butterfield Trust (Bermuda) Ltd , the Supreme Court of Bermuda was asked to determine whether a former trustee, which had been removed and replaced due to an alleged breach of trust, was entitled to retain significant trust assets for the purpose of securing its indemnity against future defence costs and liabilities.
Butterfield Trust (Bermuda) Ltd (Butterfield) was the trustee of two large trust funds and, following a disagreement over the management of the trusts, Butterfield was replaced as trustee by Meritus Trust Co Ltd (Meritus). Butterfield sought to retain trust assets to indemnify itself against anticipated claims for breach of duty, but Meritus and the beneficiaries objected. Butterfield also sought a contractual indemnity from Meritus.
Meritus argued that there was no right of retention or right to contractual indemnity at law. Butterfield argued that there was a line of English authority supporting a retention and indemnity.
The matter was complicated by Bermuda’s Trustee Act 1975 which, at Section 27(d), requires an outgoing trustee to vest trust assets in the incoming trustee.
The court agreed with Meritus, and cited, with approval, the Australian case of Lemery Holdings Ltd v Reliance Financial Services Pty Ltd ) in support of its finding that, in the absence of a contractual or statutory right, there was no right to a retention from the trust assets. As neither the trust instrument nor Bermuda’s Trustee Act granted Butterfield the right to retain trust assets, Butterfield was unable to retain trust assets as security against the putative breach of trust claim.
Although this decision turned on the particular provisions of Bermuda’s Trustee Act, it offers a helpful analysis of the law from other jurisdictions as well.
In any event, the case illustrates that it is important for professional trustees, and their liability insurers, to pay careful attention to applicable statutory provisions, and the wording of any trust deed, regarding retention of trust assets as security for contingent liabilities.