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Creation of a sub-fund may be administration, not variation of beneficial interests

Where, in the administration of a trust, the trustees desire to carry out a transaction that they consider to be "expedient", but find that they do not have the necessary power, either under the terms of the trust instrument or the general law, they may apply to the court under section 57 Trustee Act 1925 for grant of such power as is necessary.

Section 57 provides:

"Where in the management or administration of any property vested in trustees, any…transaction, is in the opinion of the court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument, if any, or by law, the court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose…"

The principal restraints on the section 57 power are that (i) the transaction must be in the interests of the beneficiaries as a whole, and (ii) the proposed transaction must relate to the administration of trust property. Decisions in several cases in the 1950s established that the section 57 jurisdiction could not confer the power to "eliminate, vary or re-mould dispositions or trusts that the settlor himself has sought to establish" (Re Downshire [1953] Ch 218), but was limited to "managerial supervision and control of trust property on behalf of beneficiaries"(ibid). The expression "trust property" could not "by any legitimate stretch of the language include the equitable interests which a settlor has created in that property" (ibid).

The regime for variation of the equitable interests established under a trust depends on consent. Where all possible beneficiaries of a trust are of full age and capacity, they may consent to a trustee's departure from the terms of the trust. The Variation of Trusts Act 1958 (VTA) enabled the court to give approval on behalf of certain categories of persons as were unable by incapacity or otherwise to give their approval to any arrangement varying or revoking all or any of the trusts, or enlarging the powers of the trustees of managing or administering any of the property subject to the trusts.

In Christopher Southgate & Anor v Peter Sutton & others [2011] EWCA Civ 637 the Court of Appeal was asked to confer a section 57 power on trustees to create a sub-fund. A group of beneficiaries under the relevant trust was resident in the United States. Along with other UK resident beneficiaries, they had an interest in the income and capital of the whole trust property. The US beneficiaries were exposed to double taxation, which could be avoided by the creation of a sub-fund to be administered by US trustees. The trustees did not have the power to establish the sub-fund, and the Court of Appeal heard evidence that it would not be possible to obtain the consent of all adult beneficiaries, ruling out a VTA application.

There were two potential stumbling blocks in an application under section 57. First, could a transaction designed to mitigate taxation for one group of beneficiaries be "expedient", i.e. in the interests of the trust as whole? Secondly, does the creation of interests in the whole of a part of the trust property, as opposed to shared interests in the whole of the trust property, represent a variation in the beneficial interests?The Court of Appeal held that the transaction was expedient. It heard evidence of a deepening rift between the US and UK beneficiaries, such that each thought any proposed administration of the trust property favoured the other. The trustees argued that division of the trust property offered a pragmatic solution to that difficulty. This was accepted by the court.At first instance, Mann J had refused the application, holding that the transaction was a variation of the beneficial interests requiring VTA approval. He had been influenced by Re Freeston's Charity [1978] 1 WLR 741, in which Goff J said: "it is manifest that an interest in half the income of an undivided fund is quite different from the whole income of a divided half of that fund". The Court of Appeal distinguished Freeston, finding that it recognised only that there "may" be variation in the beneficial interests of a partitioned fund, and that the proposed partition in Freeston would have led to "more than an incidental impact on the beneficial interests", whereas here the impact was "incidental only".Applications under section 57 will turn on their own facts. However, the decision in Southgate demonstrated a willingness on the part of the Court to extend its jurisdiction to confer transactional powers on trustees where: (i) there is a plain benefit to a body of beneficiaries, (ii) that benefit cannot be achieved by any other means, (iii) the transaction can be seen to be in the interests of all beneficiaries, and (iv) any potential impact on the structure of the beneficial interests is merely "incidental".

It is notable that the UK beneficiaries were not represented on the appeal. It will be interesting to see what happens should a group of beneficiaries seek to prevent a partition in similar circumstances in reliance on Freeston in the future.

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