Smith & Anor v Michelmores Trust Corporation Ltd & Ors

A trustee seeking the court’s blessing for a momentous exercise of a discretionary power must establish that the decision is properly constituted, within the scope of the power, rational, made after considering relevant matters, and free from disabling conflict. The court must give those materially affected an opportunity to make representations. An appointment to a bankrupt beneficiary is not for that beneficiary’s benefit where it will principally benefit creditors and the appointing estate. Such an appointment may also constitute a fraud on the power where its real purpose is to benefit a non-object. A beneficiary of an existing discretionary trust has an equitable interest capable of disclaimer. Mere delay, without acceptance or reliance, does not necessarily prevent disclaimer.

The claimants were trustees of a discretionary trust created by the will of Hope Crawshay. They sought the court’s approval under the Public Trustee v Cooper jurisdiction for an appointment of the trust fund to the fourth defendant, John Crawshay, while he remained bankrupt. The proposed appointment would have been claimed by his trustees in bankruptcy and would have benefited the deceased’s estate, of which the first claimant was personal representative and major creditor.

The claim was issued shortly before the defendant’s expected discharge. John’s children and remoter issue, who were also objects of the power, were not joined. John opposed the appointment and executed a deed disclaiming his interest shortly before the hearing. The central issues were the proper constitution of the proceedings, the propriety and scope of the proposed appointment, conflict of interest, fraud on the power, and the effect of the disclaimer.

1. Disposition and constitution. The claim was dismissed. Under CPR Part 64, beneficiaries with an interest under the trust should ordinarily be joined or properly represented where the order is intended to bring certainty to the trust administration. John’s children and remoter issue had the same legal status as objects of the power, but their factual interests differed materially because John was bankrupt and they were not. The proceedings were therefore not properly constituted.

2. Category 2 approval. The court adopted the requirements summarised in Public Trustee v Cooper and Schumacher v Clarke: the trustees must have formed the relevant opinion; a reasonable body of trustees, correctly instructed, could properly have reached it; and the decision must not be vitiated by conflict. The court’s approval is discretionary and should be approached cautiously because it may prevent later complaints of breach of trust.

3. Benefit and fraud on the power. The proposed appointment would not objectively benefit John. It would confer no direct financial benefit and would pay only a small fraction of the bankruptcy debts. Its real benefit would flow to the deceased’s estate, which was not an object of the power. The appointment was therefore outside the power. Alternatively, its real purpose was to benefit a non-object and it would be a fraud on the power. The trustees’ decision was irrational and failed to take relevant interests properly into account.

4. Conflict. The first claimant was both personal representative and principal creditor of the estate and trustee of the discretionary trust. Her role created a stark conflict. Awareness of the conflict did not cure it. The trustees could have retired or surrendered their discretion to the court, but neither occurred.

5. Disclaimer. A beneficiary or object of an existing discretionary trust has an equitable interest, consisting of rights including the right to due consideration by the trustees. That interest may be disclaimed. Mere lapse of time is not necessarily fatal where there has been no acceptance or reliance. John had validly disclaimed his interest. Alternatively, the deed operated as a release of the trustees’ future obligations to consider him.