Under The Influence? A Review Of A Recent Cayman Islands Decision That Finds Care For The Entire Beneficial Class Is The Pivotal Factor In Determining Undue Influence

• Published date: 27 June 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Arbitration & Dispute Resolution, Trials & Appeals & Compensation
• Law Firm: Collas Crill
• Author: Mr Andrew Peedom

• This article will cover the recent judgment of the Grand Court of the Cayman Islands (the Court), which concerned whether a declaration of exclusion by a settlor excluding beneficiaries of a trust was invalid due to a lack of capacity, undue influence unlawful means conspiracy and/or proprietary estoppel.
• The Court held that although the late settlor had capacity, his decision was a consequence of undue influence such that the declaration of exclusion was liable to be set aside.
• The 250 page judgment, which followed a trial of almost six weeks' duration, confirms and, to some extent, re states the guiding principles for a finding of mental incapacity and undue influence respectively. It illustrates the crucial role that the factual circumstances play in determining such issues, and also provides a stark reminder that warring parties should consider alternative dispute resolution to avoid protracted, expensive and bitterly contested court proceedings wherever possible.

Uncontested evidence that the late settlor of a discretionary trust wished to take care of all relevant parties was the pivotal factor in support of a finding by the Grand Court of the Cayman Islands (the Court) that he had been unduly influenced.¹ Consequently, a 'declaration of exclusion', which sought to remove certain family members as beneficiaries of a discretionary trust, was liable to be set aside. This was despite a finding that the settlor possessed sufficient mental capacity when he executed the said declaration.

Background

Alan Poulton (the Settlor) was a successful businessperson from London. In 2003, he established a discretionary trust (the Trust) for the benefit of himself, his children and their issue. The Trust was comprised of his 50 per cent interest in a family business established by him and where two of his children were employed. Initially, the Trust's terms provided that the Settlor was entitled to 100 per cent of the Trust's income during his lifetime, with his five children (born to three mothers) becoming entitled to income and capital that accrued after his death. The children were the plaintiffs in the proceedings.

The Settlor purchased a home in Florida in the 1990s and travelled between there and London regularly. He met and married his first wife in the US in the early 1990s, with the marriage ending in 2003. He married the second defendant, D, in 2004, which lasted until his death in 2016.

By 2014, D was a beneficiary of the Trust, entitled to 40 per cent of its income for her life after the Settlor's death. In early 2015, the Settlor was advised:

• of a very substantial liability to the US Internal Revenue Service (IRS) for failing to disclose the Trust; and
• that he should terminate the Trust and establish new trusts in the US to hold the Trust assets and make similar provision for his children.

On 17 July 2015, the Settlor executed:

• a deed of amendment facilitating the distribution of income and capital from the Trust to satisfy his IRS liabilities; and
• a deed of appointment, indemnity and termination, to realise the distribution of shares in the family company to himself and terminate the Trust (the Deeds).

By letter to the trustee, dated 3 August 2015, the Settlor's US lawyer (who was advising in relation to his tax issues) indicated that the Settlor intended to provide both for D and for his five children.

In October 2015, the Settlor, who was already in poor health, received a diagnosis of terminal cancer. His children last saw him in August 2015 and complained to the trustee that they were being denied access to the Settlor. They raised concerns about his mental capacity and D's undue influence.

By letter dated 24 February 2016, the Settlor removed his children as beneficiaries of the Trust (the Declaration of Exclusion) and requested that the trustee terminate the Trust and distribute the Trust fund to himself and D. D, together with her son and daughter-in-law (the third and fourth defendants, respectively) allege this letter to have been executed in March 2016. The Declaration of Exclusion also substituted D, her son and daughter-in-law as directors of the family company for two of the Settlor's children. In May 2016, the trustee resolved to give effect to the Settlor's wishes. The Settlor died in June 2016, before all corporate formalities relating to the transfer of the company previously owned by the Trust to D...