Is a protector entitled to be indemnified out of trust assets?

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Where trustees:

  • have a discretionary power to indemnify a protector; or
  • are obliged to indemnify a protector other than for loss arising out of his own fraud or dishonesty;

the trustees are entitled to wait and see whether allegations of fraud (which are not frivolous) brought against the protector are proven before determining whether or not to indemnify him.

IFG International v French (2013) (an Isle of Man case) involved a protector who was seeking an indemnity, out of the trust assets, in respect of the costs of defending himself against allegations of fraud.

Key points from the judgment include:

  • where the trustees have a discretionary power to indemnify the protector the court will not interfere in the exercise of the trustees’ discretionary power unless the trustees appear to be acting improperly. The trustees are bound to make proper enquiries and to take all relevant matters (and no others) into account in deciding whether to exercise their discretionary power. In this case, where credible allegations of fraud had been made against the protector, the trustees would only be in a position to make a fully informed decision once those proceedings had concluded;
  • equally where the trustees are obliged to indemnify the protector other than for loss arising out of his own fraud or dishonesty, the trustees are entitled to wait and see whether allegations of fraud (which are not frivolous) brought against the protector are proven before determining whether or not to indemnify him;
  • whilst, in certain circumstances, a court might imply a right for a protector to be indemnified (against costs reasonably incurred in carrying out his role), it will not do so where there is an express indemnity in the trust deed;
  • when construing an indemnity provision in a trust deed, a protector is entitled to have the provision fairly construed according to the natural meaning of the words used, and without any doubt or ambiguity in the provision being construed against him.

Facts

Mr French was the protector of a number of trusts. The US Securities and Exchange Commission had brought proceedings against the protector alleging that he had assisted the settlors with a fraud and he sought to be indemnified from the trusts for his costs in defending those proceedings.

In some of the trusts, the trustees were given a discretion to indemnify the protector; in others the trustees were obliged to indemnify the protector, other than for loss or expense ‘arising out of his own wilful and individual fraud or dishonesty’.

Role of a protector

The Court also made some general observations on a protector’s role, commenting that:

  • a protector’s role ‘is to ensure that both the letter and the spirit of the settlement are complied with’ and that in exercising the powers granted to him, a protector owed a fiduciary duty to the beneficiaries (and not the settlor);
  • a protector had a fiduciary duty to exercise his powers in good faith in the interests of all the beneficiaries of the trust; and
  • a protector’s functions will often extend beyond the ambit of those specific powers set out in the relevant trust deed and will, or may, encompass a general supervisory or advisory role.

Authors

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