Substratum ' What Is It And Do I Need To Worry About It?

• Published date: 13 April 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Trials & Appeals & Compensation, Trusts
• Law Firm: Ogier
• Author: Mr Jordan Constable

There has been debate between legal academics and trust practitioners about whether a power holder is prohibited from exercising powers of addition or exclusion of beneficiaries, or other analogous powers, when the proposed change is so significant that it has the effect of changing the basic purpose, or 'substratum' of the trust. That is to say, the exercise of trust powers would result in an outcome closer to a fundamental change to the purpose of the trust itself than a simple variation, or addition or exclusion of beneficiaries.

This article considers recent authority on the so-called 'substratum' principle, and in particular how those authorities might impact similar proceedings before the Grand Court of the Cayman Islands.

The 'substratum' principle

The origins of the principle can be found in jurisprudence from the Courts of Equity, however the dicta of Megarry J in Re Ball's Settlement Trusts [1968] 2 All ER is often cited [at 442-443] "if an arrangement changes the whole substratum of the trust, then it may well be said that it cannot be regarded merely as varying that trust". Indeed, case law indicates that a valid variation to the trust's substratum would be better characterised as a revocation and restatement of the trust.

The substratum principle is inexorably linked with the doctrine of fraud on a power - that a power cannot be used for a purpose other than that for which it is given. For instance a power of amendment can only be exercised if the amendments (including changes to the beneficial class) could "reasonably be considered to have been within the contemplation of the parties when the trust instrument was made, having regard to its nature and circumstances"¹.

Bermuda

In Grand View Private Trust Company Limited v Wong & Ors (Civil Appeal No. 5A of 2019) the Court of Appeal for Bermuda considered a decision on an application for summary judgment on a point of law given by Kawaley AJ as to the validity of a trustee's exercise of powers. While the facts of the dispute are complex (the Court of Appeal judgment extends to 144 pages) the core of the dispute was whether the trustee of an irrevocable discretionary family trust (the Global Resource Trust or GRT) could change the beneficial objects from natural person family members of the settlor to a Bermuda law Purpose Trust (the Wang Family Trust) which had no natural person beneficiaries, before appointing all of the assets to the latter trust.

The court at first instance found that the...