Smellie J
IN THE GRAND COURT OF THE CAYMAN ISLANDS
CAUSE NO: 258 OF 1998
IN THE MATTER of Section 45 of the Trusts Law (Revised)
AND IN THE MATTER of GCR Order 85, rule 8
AND IN THE MATTER of the Cotorro Trust originally constituted by a Trust Agreement dated the 1st day of June 1979 between Maria Ernestina Bacardi y Gaillard and Roy West Trust Corporation (Cayman) Limited, now named Coutts(Cayman) Limited.
Direction
This is an application by the Trustee for the written directions of the Court upon a question relating to the management and administration of the Trust.
The application is made pursuant to GCR Order 85 Rule 8 and is supported by the written submissions of the Trustee’s lawyers and by an affidavit of an officer of the Trustee.
The question is whether orders already made - that the costs of all but one party to the action be paid out of the assets of the Trust on an indemnity basis - should be satisfied out of income or capital.
I regard this manner of application by way of GCR Order 85 Rule 8 as appropriate primarily for the reason that what is sought is essentially clarification of the orders for costs already made.
The Trustee, on advice, has taken the view that the payments are appropriately to be made out of capital. In keeping with the mechanism presented by the Trust Deed the Trustee
has put the matter to the Management Committee which has full responsibility for the Special Companies the shares in which constitute the capital of the Trust. Some of those shares would have to be sold in order to satisfy the orders for costs if to be paid from capital. The Management Committee has unanimously agreed with the Trustees views.
This application is nonetheless a prudent one given the substantial costs billed as having been generated by this very complex litigation - some USD 2.2 million as at September 23rd, 1997 - and because members of the Management Committee may have been placed arguably in a position of conflict of interest in having to decide the question posed by the Trustee. The Trustee is also concerned not to proceed without the directions of the Court given the obvious importance attached by the Grantor to preserving intact the shares of the Special Companies.
This intention of the Grantor is manifest from Article Ninth (F) of the Trust Deed which requires the unanimity of the Management Committee in regard to any sale, alienation, pledge, assignment or other encumbrance of the shares of the Special Companies.
The case law is clear that unless otherwise directed by the instrument creating the trust, costs and expenses incurred by way of legal proceedings or otherwise for the benefit of the estate as a whole should be met from capital. Such proceedings or expenses relate exclusively to the tenant for life entitled to income or in some other manner exclusively to income then they may well be directed to be paid from income. See Underhill & Hayton, Law of Trusts and Trustees 15 Ed. Article 53 (d) at page 535; Halbury’s Laws 4th Ed. Vol. 48 para 637 and Carver v. Duncan [1985] 2 ALL E.R. 645.
Here the proceedings involved the determination of questions of the validity of certain amendments to the Trust deed which enabled the distributions of capital and of the
subsequent distributions of capital pursuant to those amendments to the beneficiary who was, prior to the amendments and distributions, the income beneficiary for life.
For reasons already expressed, this court has held that those proceedings were for the benefit of the estate as a whole and that the costs of the parties (except the third defendant) should be met from the assets of the Trust. See written rulings given on 17th January 1977 (as to the costs of the 5th defendant); on 2nd June 1977 (as to the costs of 1st, 2nd, 6th and 7th defendants) and order of 29th June 1995 (as to the costs of the Guardian ad litem of the 4th defendant).
Apart from opposition to the costs of the 5th defendant there was no dispute that those orders for costs were properly to be made. And on account of the economies of effort as between those representing the 4th and 5th defendants on the arguments as to the validity; the award of the 5th defendant’s costs could in no sense be regarded as a superfluous award. Whether at the end of the day the actual quanta of costs are justified, will be a matter for the Trustee to ensure.
In response to the question now submitted to me for directions, I am satisfied that the proper view to be taken of the matter is that the ordinary rule cited above and which requires payment from capital, should apply.
For present purposes it is important to note that the question of validity was one of construction. All beneficiaries had an interest in having it properly resolved as serious and troubling challenges to validity had been raised.
Had the challengers been successful the corpus of the Trust would have been redoubled as a result of requiring the recovery of the capital earlier paid out.
In the result they were unsuccessful, and it would now be wholly unjust that the income beneficiary should be required to meet the entire costs of the challenge which would be the effect of a directive that the costs be met from the income of the Trust to which she is entitled.
Moreover, by directing payment from capital, the resultant dimunition of capital will be borne not only by the other beneficiaries (contingent income and capital beneficiaries) but by the present income beneficiary as well, whose income which is yielded from capital will diminish in proportion to the amount of capital to be sold to meet the costs of the action. Thus the burden will be shared by all the beneficiaries according to their respective interests in the Trust.
It was never the intention of the Court that these costs be met from income. This is reflected in the earlier orders that the costs of all the parties mentioned, including the income beneficiary herself, were to be paid out of the assets of the Trust. In relation to her, such an order would be meaningless if intended to be met from the income to which she is entitled.
For all the foregoing reasons I direct, in accepting the written submissions made on behalf of the Trustee, that the orders for costs under discussion be met from the capital assets of the Trust.
Anthony Smellie
JUDGE OF THE GRAND COURT
Dated this 5th day of May 1998.