Oakhurst Property Developments (Lowndes Square No. 2) Ltd & Ors v Blackstar (Isle of Man) Ltd & Anor

For removal of a trustee, a requirement to provide reasonable security for indemnity does not require both an unqualified indemnity and separate security. The security itself must be reasonable in the circumstances. It may consist of a covenant from a person of substance and may contain reasonable qualifications.

The assessment must account for the risk that the outgoing trustee’s existing rights will become practically worthless after removal, including through changes to the trust assets or distributions. A merely nominal or illusory indemnity is insufficient where a residual potential liability remains. On the facts, an uncapped personal covenant, subject to a limitation by reference to the trust assets at the date of removal, was reasonable.

The claim concerned four employer-funded retirement benefit schemes. The claimants sought to replace Blackstar (Isle of Man) Ltd as trustee with Church Street Trustees Ltd under the schemes’ trust deeds.

The proposed removal was effected by a deed containing an indemnity from the incoming trustee. Blackstar had received notice of removal, but disputed whether the indemnity amounted to the reasonable security required by clause 6.3(b) of the trust deeds.

Floyd J had ordered an expedited trial of two issues: whether Blackstar had been removed and, if not, what reasonable security was required. The central questions were the construction of clause 6.3(b), the adequacy of the existing indemnity, and the form of security required.

1. Construction of clause 6.3(b). The clause required reasonable security for indemnifying the outgoing trustee. It did not separately require an unqualified indemnity and additional security. Security could be qualified or limited, provided that it remained reasonable in all the circumstances.
2. Permitted form of security. A covenant from a person of substance could constitute security. The clause did not require a pledge, lien, charge or mortgage.
3. Adequacy of the existing protection. The outgoing trustee’s rights under rule 12.5, section 31 of the Trustee Act 2000, and the deed were substantially limited by reference to the trust assets from time to time. The trust deeds permitted loans on non-arm’s-length terms, creating a real possibility that the trust assets could be reduced to a nominal value. The outgoing trustee had no control over that risk after removal. The indemnity could therefore prove illusory. The fact that no substantial tax or penalty liability had been demonstrated did not make the residual risk absolutely nil.
4. Effect of distributions. Clause 4.1(b) of the deed dealt with the appointment of further trustees or a distribution of capital. It did not apply merely because a beneficiary spent money received from the trust. The beneficiary’s expenditure would not trigger a further covenant under that clause.
5. Result. The deed of 13 October 2011 did not provide reasonable security. Blackstar had therefore not been removed as trustee. A personal covenant from the first claimant and the relevant employee, not limited by the value of the trust assets from time to time but capable of being limited by their value at the date of removal, would constitute reasonable security, subject to possible further argument concerning tax consequences. Permission to apply was given on that issue. The claimants were ordered to pay 75% of Blackstar’s costs of the two issues decided.