On 8 December 2022 the Privy Council delivered its advice to His Majesty in the case of Wong v Grandview concerning the use of fiduciary powers to add and remove beneficiaries. The decision clarifies that such powers are not unlimited in their scope. Limitations are imposed on them by reference to the proper purpose rule, namely the rule that powers can only be used for the purpose for which they were bestowed in the first place.
The Global Resource Trust (the GRT) was a trust established by the two founders of the Formosa Plastics conglomerate for the benefit of their issue. Their children and remoter issue were the discretionary objects of the powers to advance and appoint and they were also the default beneficiaries. On the same day as the GRT was settled, a purpose trust was also settled called the Wang Family Trust (the WFT) to which some of the founders’ substantial wealth was transferred. The founders’ issue could not benefit from the WFT. Around 5 years after its creation, the trustee of the GRT used its trust powers to add the trustee of the WFT as a beneficiary, remove all the original beneficiaries and appoint the entire fund out to the trustee of the WFT.
On behalf of the eldest son of the eldest founder Elspeth and her team (Dakis Hagen KC, Emma Hargreaves and Stephanie Thompson instructed by Anthony Poulton of Baker McKenzie) launched a claim challenging those decisions of the GRT trustee and they applied for summary judgment on their claim on the basis that there was no realistic defence to the claim that the powers had not been used for the purposes for which they were conferred. Kawaley AJ agreed. The Court of Appeal in Bermuda did not, and overturned Kawaley AJ’s decision. The Privy Council has now agreed that the GRT trustee’s decision was taken for an improper purpose: the GRT had a clear purpose (which was to benefit the founders’ issue) and that informs the purpose for which the powers of addition and exclusion of beneficiaries had been conferred, and should be used (to benefit the founders’ issue). The GRT trustee had not used the powers to benefit the founders’ issue and had therefore used them for an improper purpose.
- The term “fraud on a power” should be discarded. The rule by which equity controls the exercise of a fiduciary’s powers to ensure that they are only used for the purpose for which they were bestowed should be referred to the proper purpose rule (paras 55 and 56)
- The proper purpose or purposes of a fiduciary power must be determined objectively at the date of the creation of the trust (para 61)
- Cresswell J’s statement in Re Shiu Pak Nin  (1) CILR 173 that “the exercise of a power of addition [to a discretionary class] will, by definition, never be in the interests of an existing class (as their beneficial interest will be diluted)” cannot be supported (para 82)
- a power of addition and removal of beneficiaries is not a species of, or analogous to, a power of amendment (see para 98) (contrary to statements in texts that it is)
- there is no absolute substratum rule – the key is to discern what the purpose of the trust when it was created was. That purpose (if there is one) will then inform the purpose for which the powers in the trust were given.
The judgment can be found here.
Elspeth Talbot Rice KC is a highly sought after silk for high value, complex international trust disputes.