Published by Evelyn Ioannou
Historically the most pivotal constituencies for the establishment of a trust have been the settlor, being the person who provides trust property to be held on trust for the benefit of another person, the trustee, being the person who holds the property on trust, and finally, the beneficiary, being the person for whose benefit the trust is established. The concept of the “protector” of a trust has been introduced in modern equity as a safeguard against the potential of misconduct by the trustees and has evolved throughout the years so as to become a common, almost indispensable part of an international trust.
In plain terms the purpose of appointing a protector to a trust is to have someone supervising the trustees as they may sometimes be given far-reaching discretionary powers which they can use for purposes other than those for which the trust has been created. The protector is normally appointed by the settlor. The most important power which is normally given to protectors is the power to appoint and remove the trustees.
Further, protectors can provide advice to the trustees with regards to the exercise of their duties, they can appoint a successor trustee or a successor protector; approve any amendments, including clauses concerning the governing law, of the trust deed, approve the addition or removal of beneficiaries or class of beneficiaries under a discretionary trust, provide approval in connection with matters of investment of the fund and distribution of the estate, approve termination of the trust and they may sometimes have a veto over the trustee’s administrative discretions. Generally, the powers of the protector can be divided into two separate categories, the first one concerns all actions which in order to be carried out by the trustee require the protector’s consent, being called the “negative” powers and the second one concerns the so-called “positive” powers of the protector to direct the actions of the trustees and more importantly power of appointment and removal. All powers of the protector should be adequately and clearly stated in the trust deed.
The main obligation of the protector, as its name suggests, is to “protect” the interests of the beneficiaries of the trust by way of supervision of the administration by the trustees and preventing the latter from abusing their powers or breaching their duties. The protector is in essence in a fiduciary position, therefore, is subject to the so-called fiduciary duties with regards to the exercise of powers which could adversely affect the beneficiaries. This means that the protector should act in good faith and in the best interests of the beneficiaries and should avoid placing himself in a position of conflict or making unauthorised profits from trust property.
Further, it is important to note that the powers of the protector should not be excessively wide and far-reaching because it will in essence lead to an overlapping between the role of the trustee and the role of the protector and as a result the protector may be treated as a co-trustee for tax purposes, especially in cases where the protector is not an offshore resident.
There is no authoritative case law on the liability of protectors in Cyprus and guidance is being sought mostly from English case law. If the protector is considered as holding a fiduciary position, then he can be liable for breach of trust. It has been argued that if a protector assumes voluntarily responsibility to the beneficiaries, he may be liable to them in the tort of negligence. As with the case of trustees, breach of trust can lead to personal liability if as a result of the breach there has been unauthorised gain or loss to the trust property. If there is loss, then the person who has committed the breach should restore the trust to the position it was before the breach by way of monetary compensation and if there is unauthorised gain, then the person who has committed a breach should account for such gains. Although a trust deed may include clauses so as to exclude liability by reason of negligence, a protector who acts in a fraudulent, dishonest, or reckless manner can hardly escape liability. In Re Jasmine Trustees Limited  JRC 196 the competent court held that the power to appoint trustees is a fiduciary power irrespectively of the person exercising such power therefore a fiduciary duty is owed by the person vested with such power. The ultimate decision in cases of breach lies with the competent court in each case.