How Do I Change a Commercial Trust in England?

As a business owner, you may be interested in a commercial trust. You could be a beneficiary or a trustee and may wonder how you can change the terms of the trust arrangement. For instance, you might want to ensure that one beneficiary can access a larger share of the dividend income. Therefore, you must understand how to change commercial trusts in England. This article will first explain why you may wish to vary a trust in a commercial context and then explain how trust law allows you can change commercial trusts.

Commercial Uses for Trusts

Trusts are a complicated area of law and can take many different forms. This article  examines two different commercial trusts, namely: 

• trusts under a security trust; and
• a family trust holding the shares in a company

In a commercial context, you might use a trust in the following ways:

• to preserve family ownership in a business; 
• to hold client money in certain insolvency situations; 
• to grant security over a business’ assets on behalf of numerous creditors;
• where a company has created an employee incentive scheme, including pensions; and 
• certain investment vehicles commonly called unit trusts. 

The law will also create a trust in certain circumstances, even where none of the parties necessarily intended for a trust to arise. These are called implied trusts. 

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Security Trusts

A security trust is a trust where a trustee holds on trust for the lenders the security interest in the borrower’s property. For instance, lenders will appoint a security trustee in a secured syndicated loan which is where a borrowing company has received a single loan from several different bank lenders. The security trustee holds the security interest on trust for the lender. This means: 

• the trust property is the security interest (i.e. the right to take the borrower’s assets if it defaults);
• the trustee is the security trustee, commonly called the security agent or collateral agent, whose role is to enforce the security interest on behalf of the lenders in the event the borrower defaults;
• the beneficiaries are all the lenders to the loan; and 
• a separate deed called the security trust deed usually sets out the terms of the trust (the trust instrument). 

You use a trust structure because otherwise, each lender would have to obtain an individual security interest in the business’ assets, which is impractical. 

Example of Why the Trust May Be Varied

The trust deed may state that the security agent must wait for instruction from the lenders before acting if the borrower defaults under the loan terms. However, the lenders may want to change the terms of the trust deed so that the security trustee can exercise its discretion in enforcing the security interest against the borrower. This would constitute a trust variation.

Family Trusts Over Business Shares 

Additionally, you might have started a business decades ago, which has grown into a highly successful enterprise. While you could liquidate the company and divide up the proceeds amongst your family, this does not make good commercial sense as the firm would provide a source of income for your family for years.

Instead, you might include wording in your will, stating that the shares in the business are to be held in trust for the benefit of your immediate family. Likewise, one particular term could be that your daughter receives the income from the company (dividends) for life. 

Notably, the trust will come into existence after your passing. If your daughter wishes to vary the trust so that she is entitled to own and sell the shares outright, she must lawfully vary the trust.

Varying a Trust  

In all trusts, regardless of their purpose, you can only vary the terms as set out in the trust instrument or implied by law in two circumstances:

• by consent of all the beneficiaries; and
• by the power of the court in limited circumstances. 

Additionally, specific laws apply to particular kinds of trust that provide additional ways to vary the trust.

By Consent of the Beneficiaries 

All the beneficiaries of the trust can unanimously consent to vary the terms of a trust, but only where:

1. each of the beneficiaries is over the age of 18 and of sound mind; and 

2. all of the beneficiaries have come into existence. 

In a commercial context, meeting these conditions is rarely a problem. For the first example, provided all lenders agree to give the security trustee discretion to exercise the security interest on their behalf, the trust can be varied accordingly. 

In the second example, it is less clear. If the trust document lists each individual beneficiary, they are all named, and they all consent, then you can vary the trust document. However, if one of the beneficiaries is under 18, the trust document cannot be varied, regardless of whether every beneficiary consents. 

Finally, you may not meet the second condition if the trust document does not specify each beneficiary individually. For instance, if the trust document says, “All my shares, to be held in trust for each of my living children in equal portions for life, and then to their children, rather born now or later…” — there are beneficiaries that are yet to be born. In this case, the trust cannot be varied because particular beneficiaries have not come into existence. 

Limitations 

The law distinguishes between the terms of the trust and the trust’s administration. The trust deed sets out the terms of the trust, including:

• what the trust property is (e.g. the security interest or company shares);
• who the beneficiaries are (lenders or family); 
• the nature of the beneficiaries’ interest in the trust property; and
• specific terms related to the extent of the trustee(s)’ powers.  

Terms do not include general powers of discretion the law gives trustees, such as how to manage the trust property from time to time. These are considered discretionary powers.

The beneficiaries’ ability only applies to variations on the terms of the trust, so beneficiaries cannot compel the trustees to administer the trust in a particular way. However, if the trustee does not administer the trust in a specific way, the beneficiaries can compel the trustee to resign. They can then appoint a new trustee more amenable to their wishes. 

By Power of the Court 

In limited circumstances, the court can vary the terms of the trust, including:

• emergencies that the person who made the trust did not intend for; and
• where the trustees are unable to manage the trust or refuse to.

The court can also vary the terms of the trust on behalf of a beneficiary that is either:

• under 18;
• a beneficiary not yet born; or
• a beneficiary that lacks mental capacity.

However, this circumstance is unlikely to be relevant in a commercial context. 

Key Takeaways

There are many reasons why a beneficiary may want to vary the terms of a trust in a commercial context. For example, to give the security trustee discretion without having to wait for the instruction of enders. To vary a trust, you must have, for example,  the content of all the beneficiaries.  However, beneficiaries cannot compel the trustee to change how they administer the trust. A court can order terms to be varied, but this is rare. 

If you need help with a commercial trust, our experienced commercial lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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