Manx Appeal Court orders trustee to reconsider decision not to appoint protector

The Staff of Government Appeal Division of the High Court of Justice of the Isle of Man set aside an order of the High Court on 19 July 2021 and directed a trustee to reconsider its decision not to appoint a new protector to the trust, despite a request for it to do so by all the adult beneficiaries of the trust.

In Annaluisa Pesenti Mazzoleni v Summerhill Trust Company (IoM) Ltd. (2021/03 2DS), the appellant Annaluisa Pesenti Mazzoleni was the principal beneficiary of the RR2 Trust, one of four trusts established in the Isle of Man by the settlor, the late Mrs Rosalia Radici Pesenti, in June 1994, each of which was for the benefit of one of her children and his/her heirs. Mrs Pesenti died in 2007.

The four trusts formed part of the complex ownership structure in respect of a controlling interest in an Italian cement company Italcementi SpA (ITC), through another company known as Italmobiliare SpA (ITM) that is listed on the Milan stock exchange.

Mrs Pesenti had given a Letter of Wishes to the original trustees stating that that the trust was primarily for the benefit of the appellant, and only after her death for the benefit of her children and, after their death, for the benefit of their descendants. The Letter of Wishes also stated: “Please take note of the fact that I have appointed a protector and that the latter has been granted powers that I could have reserved to myself had I been younger, in order to ensure that my wishes concerning the future of the Trust Foundation are fulfilled.”

In 2015/2016 ITM transferred its shareholding in ITC to a German company, HeidelbergCement AG, for €1.67 billion. The appellant and her sister Camilla complained that they knew nothing of this proposed sale and, although the Pesenti family retains its control over ITM, the appellant asserts that the company has been transformed from a holding company through which the family controlled and led ITC into an investment company managing a portfolio of shareholdings in a variety of sectors.

The appellant and her sister commenced proceedings in Italy against a number of family members, companies, trustees and former trustees, and the former protector of the four trusts. The purpose of the proceedings was to claim damages for failure to take into consideration the rights of the Italian plaintiffs as heirs to Mrs Pesenti’s succession, together with an invalidity claim attacking the whole structure that she established.

Italo Lucchini, who had been appointed protector of the four trusts in 1998, resigned in October 2017 when litigation commenced. His nominated successor declined each of the offices. The two remaining individual trustees of the four trusts also resigned in December 2017, leaving Summerhill as the sole trustee.

In May 2018, the appellant wrote to Summerhill saying that she did so in the place of the settlor and in accordance with her mother’s Letter of Wishes. She made it plain that in her view it was appropriate for the trust to have a protector and nominated two possible candidates. Summerhill responded that it was not minded to appoint a protector but would discuss the matter with her further when they next met.

The appellant and her sister, as beneficiaries of RR2 and RR3 settlements respectively, sought advice. Their advisers suggested that in view of fact that Summerhill, instead of seeking independent legal advice, had appointed an Italian lawyer who had historically represented and continued to represent the parties on the other side of the Italian proceedings, it was essential that a protector should be appointed to ensure that their interests were not prejudiced.

Summerhill did not accept it was in a position of conflict and indicated that it was not minded to appoint a protector at that time but would continue to keep this under review. In November 2018 all the adult beneficiaries of the trust (and a minor beneficiary represented by his parents) wrote to Summerhill supporting the request of the appellant that a protector be appointed and endorsing the suitability of the appellant’s two candidates for the role.

In January 2019, Summerhill reiterated its position, giving the following reasons in outline:

1. It did not consider there was any need to appoint a protector for either trust at that time. The only substantive reason which had been advanced by the appellant and her sister had been to ensure the provision of financial information, but as that was being provided anyway, it was unnecessary to appoint a protector to the RR2 the RR3 settlements.
2. The four trusts were involved in acrimonious litigation in Italy that had caused conflict within the family and Summerhill did not wish to take any unnecessary steps which might add to those hostilities.
3. The four trusts had considerable inter-relationships of trust assets and in some cases of beneficiaries. Those inter-relationships required some unity of decision-making across the trust structures. With that in mind it would not be desirable for the RR2 and RR3 settlements to have protectors, or different protectors to the other trusts, without good reason.
4. It considered that it essential that any individual considered for the role of protector should be impartial and independent in relation both to the family and the Italian proceedings in order to avoid any further aggravation within the family. It had to deal fairly with all the beneficiaries. Given the hostile litigation, it was difficult to conceive of an individual who might be regarded by all of Mrs Pesenti’s descendants as impartial and independent.

The letter confirmed that Summerhill would give full transparency as to the assets of the RR2 and RR3 settlements and would give full details of the trust accounts going forward.

The appellant and her sister applied to the High Court of the Isle of Man seeking relief in the form of a declaration that Summerhill’s decision not to appoint a protector was void and should be set aside and that the trustee’s power under Clause 6 of the Fourth Schedule should be exercised as soon as reasonably practicable. Clause 6 stated that: “If at any time there is no protector in office the trustees may by deed appoint a protector.”

The High Court resolved that the words of Clause 6 were clear and unambiguous. Deemster Christie thought that it inconceivable that a professional would not understand the distinction between the use of the words “may” and “must”. It would have been easy to impose on the trustees an imperative power to appoint a protector where there was none in office, but such language had not been included. He also considered that there was nothing in the overall context that suggested that the role of the protector was intended to be self-generating in all circumstances, and it was wrong to assume that the trust deed envisaged there would be a protector at all times.

The Deemster then turned to the trustee’s decision not to appoint a protector for the time being but keep the matter under review. He found that the trustee had displayed a conscientious and proper approach to the decision-making exercise and concluded that the reasons relied upon by the trustee were relevant reasons. Accordingly, he should not direct the trustee either to exercise the Clause 6 power to appoint a protector or to reconsider the decision that had already been taken. Judgment was handed down on 30 December 2020 and the Appeal Notice filed on 9 February 2021.

The Appeal Court held that the Deemster was correct to find that the trustee’s power to appoint a protector was not an imperative power and that there was no doubt that the power contained in Clause 6 was a discretionary power. “However,” it said, “as with all discretions which are capable of being reviewed by a court, it is essential that the decision-maker takes into account all relevant considerations and excludes from account all irrelevant considerations – and also, of course, that the decision-maker should reach a conclusion which is not so unreasonable that no reasonable decision-maker in his position could have reached it.”

In respect of reason 1, it found: “The trustee appeared to have considered the need for the appointment of a protector solely in the context of the provision of financial information to beneficiaries on the basis that was the reason advanced by the appellant and her sister Camilla. In approaching the matter in that way, the trustee was in error. The power to appoint a new protector was a fiduciary power which had to be exercised in the interests of all of the beneficiaries and while the reasons advanced by the appellant were relevant for the trustee to consider, it was for the trustee to review the possible exercise of the power on a wider basis. It should therefore have considered all the various protector powers as contained in the trust deed as to whether it was necessary or desirable that its powers to appoint a new protector should be exercised.”

In respect of reason 2, it found: “In context, the reason given can only mean that the trustee took into account the wider interests of the whole family, including the branches of the family other than that of the appellant and her issue. Avoiding taking steps which might add to hostilities within the family would be a proper consideration for the trustee if ‘family’ meant only the appellant and her issue. If, however, it meant it would be in the interests of the wider family and not in the interests of the appellant and her issue to avoid such hostilities, the trustee would be taking into account the interests of those who were not beneficiaries in deciding whether or not to exercise the fiduciary power to appoint a new protector.”

In respect of reason 3, it found: “The present case is one where all the adult beneficiaries of the trust support the attack which the appellant has made on the structure as a whole … That unity amongst the adult beneficiaries is the clearest indication that the inter-relationships are not perceived to be working as far as the trust is concerned, a conclusion which the trustee ought to recognise. When it comes to taking any particular decision, the trustee naturally has to have regard to the interests of the beneficiaries, and only the beneficiaries, in respect of that decision. The validity of the decision will stand or fall by the rationale which leads to it being taken. If unity of itself was the rationale for a particular decision, then one would expect that sooner or later there would come a time when the decision taken would favour the beneficiaries of other trusts but not the beneficiaries of the trust.”

In respect of reason 4, it found: “It is being suggested that the protector of the trust should be impartial and independent in relation to litigation between the appellant and other members of her family when the appellant is a beneficiary of the trust but the other members of the family are not. It could not be clearer that by giving this reason the trustee has acknowledged that it is taking into account the interests of people who are not beneficiaries of this trust for the purposes of exercising, or not exercising, its fiduciary power to appoint a protector.”

For all these reasons, the Appeal Court held that the trustee’s decision not to appoint a protector could not stand and it directed it to reconsider. It said it had deliberately gone into some detail as to its reasoning in order to give the trustee guidance in considering again not only whether, but if so whom, to appoint as protector.

It further warned that, if the trustee’s decision proved unacceptable to the adult beneficiaries of the trust and came back to the court, consideration would then need to be given as to whether the court should make a more direct order for the appointment of a protector.

“As we have stated,” said the Appeal Court, “the office of protector is frequently a fiduciary office; and in the present case we have no doubt that the power of appointment in the trustees is a fiduciary power and indeed that the powers conferred on the protector are fiduciary powers to be exercised in the interests of the trust’s beneficiaries as a whole.”