Trust – application by beneficiary/settlor for directions to be
given to former and current trustees.
[2015]JRC031
Royal Court
(Samedi)
12 February 2015
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Before :
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J. A. Clyde-Smith, Esq., Commissioner,
sitting alone
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IN THE MATTER OF THE REPRESENTATION OF C
AND IN THE MATTER OF THE Z TRUSTS I TO
VIII
AND IN THE MATTER OF ARTICLES 51 AND 53
OF THE TRUSTS (JERSEY) LAW 1984 (AS AMENDED)
Advocate J. M. Renouf for the Representor.
Advocate N. G. A. Pearmain for Mark Boothman
for Volaw Corporate Trustee Ltd.
Advocate E. Jordan for Equity Trust (Jersey)
Ltd (Respondent).
Advocate M. P. Cushing for Barclays Private
Bank & Trust Ltd.
judgment
the commissioner:
1.
I sat on
Tuesday 10th February, 2015, to hear, as a matter of urgency, the
Representation of Mrs C (“Mrs C”) who established the eight Z
Trusts of which Equity Trust (Jersey) Limited (“Equity”) was the
original trustee. She is also a beneficiary
of all but one of the trusts, all eight of which are subject to the proper Law
of Jersey. Mrs C is now 87 and is
Syrian by birth. English is her second
language. She was born and lived in
Syria all of her life until the current civil war has caused her to leave. She lives now with her son, E, in
London. He has acted through
Buckingham Securities Holdings Limited as advisor to the trusts, to the best of
my knowledge, and it is fair to say, has been the driving force behind the
activities of the trusts. Mrs C has
given him a Power of Attorney and acts through him.
2.
Equity retired
as trustee of all of the trusts in 2006 with Volaw Trustee Limited
(“Volaw”) becoming trustee of the Z Trust and Z II Trust and
Barclays Private Bank and Trust Limited (“Barclays”) trustee of the
remaining six trusts. The Z II and
III Trusts are insolvent and the remaining trusts, whilst solvent, face a
number of financial difficulties.
Barclays administers the Z III Trust under the protection of directions
from the Royal Court.
3.
To talk of
an insolvent trust is of course a misnomer. A trust is not a separate legal entity
and cannot, as a matter of law, be insolvent. Accounts of all eight trusts have, in
accordance with good practice, been drawn up as if they were separate legal
entities but the assets and liabilities disclosed by those accounts are in fact
the assets and liabilities of the trustees and it is to them that creditors
will have recourse, unless security has been granted by the trustees over the
trust assets. However it is a
useful form of shorthand and I will continue to use it.
4.
Mrs C is
very critical of the conduct of Equity as trustee and, with others, has brought
breach of trust proceedings against it in which it has raised its own
counterclaims. Mrs C places the
blame for many of the problems now facing the trusts upon Equity and it is
against that background of hostility that this current application is made.
5.
The current
difficulties facing the trusts, in addition to the financial problems, are set
out in paragraphs 24 and 25 of Mrs C’s affidavit which I will not set out
in full but they include:-
(i)
The
proceedings against Equity which I have just mentioned;
(ii) The Esporta litigation brought in England by
Barclays as trustee of the Z III Trust which I am told could be worth some
£25 million;
(iii) The potential claim against Z III Trust by
Santander;
(iv) A number of issues facing the Z III Trust which
have been occupying much court time in the last year or so; and
(v) The divorce proceedings between E and his wife,
which are apparently close to settlement, and that settlement will need to be
facilitated by funds from one or other of the trusts.
6.
Mrs C
states in her affidavit that resolving these difficulties would be very much
facilitated by the appointment of one trustee to replace Volaw and Barclays and
Rawlinson & Hunter Trustees SA (“R&H”) have agreed to take
on that role. It is based in
Switzerland but Rawlinson & Hunter is a very well-known firm. Draft deeds of appointment and
retirement of trustees (“DORAs”) have been produced but Mrs C says
that Equity has refused to be a party to them and is otherwise obstructing this
proposed change of trusteeship.
7.
Under the
terms of the deeds by which Equity retired in 2006, all of which I believe are
substantially in the same terms, it handed over the assets of the trusts in
return for what I think can be regarded as fairly standard indemnities. The relevant provisions, which I have
taken from the deed relating to the Z II Trust, are as follows:-
“4 The Retiring Trustees
hereby resign from the office of trustees of the trust and the New Trustees hereby
accept such resignation and the Retiring Trustees hereby acknowledge that
reasonable security, inter alia in the form of the releases and indemnities
herein contained, has been provided to them in respect of their trusteeship of
the Trust.
5 Subject as hereinafter provided
the New Trustees hereby covenant with the Retiring Trustees for themselves and
as trustees and agents for and on behalf of each of the Indemnified Persons that
the New Trustees will at all times hereafter release and indemnify and save
harmless the Indemnified Persons and each of them from and against all and any
actions proceedings, costs claims and demands which may be brought or made in
connection with the trusts of the Trust or in any way relating thereto or to
the trust funds comprised therein from time to time or the income thereof or
any part thereof or any taxes duties or other fiscal liabilities whether or not
now existing payable in any part of the world on or in respect of the said trust
funds of the Trust or the income thereof or any part thereof respectively or in
respect of any property transferred by or to or under the control of the Trustees
or any persons interested under the Trust and whether or not in respect of a
period or event falling wholly or partly after or prior to the date hereof and
whether the same shall be enforceable in law or not it being nevertheless
provided that;
(1)……….
(2) In the event of any person (a
“Transferee”) becoming entitled to the transfer to him as
beneficiary or as trustee or otherwise of the capital of the said trust funds
or any part thereof (a “Capital Amount”) the New Trustees covenant
that they will not part with such Capital Amount except upon terms that such
Transferee shall indemnify and save harmless the Indemnified Persons in the
same terms mutatis mutandis as this clause 5 (including the provisos) save that
such indemnities shall relate only to such Capital Amount provided further that
insofar as the New Trustees shall seek to transfer a Capital Amount to a
transferee after the expiration of 10 years from the date of this Deed such
indemnity shall only extend to liabilities in the character of tax, duties or
other fiscal claims (including interest and penalties) as specified in clause 7
herein;
(3) the extent of the liability
of the New Trustees under this clause 5 shall be limited to the said trust
funds of the Trust in the possession or under the control of the New Trustees
from time to time save that in the event that the New Trustees shall part with
any Capital Amount without obtaining an indemnity from the Transferee as
required under clause 5(2) hereof any claim under or pursuant to this clause 5
against the New Trustees shall extend also to the value of such Capital
Amount.”
8.
Since that
time Equity has been put on notice of two claims for which it says it is
entitled to be indemnified both contractually and in law:-
(i)
Irrecoverable
legal costs in the sum of £90,820.26 incurred by it in the unsuccessful
litigation brought against it in England by Fitzroy Robinson Limited, a firm of
Architects.
(ii) A claim brought by the joint liquidators of
Angelmist Properties Limited (in compulsory liquidation) for breach of duty by
its two former directors for whose actions it is alleged Equity is vicariously
liable as former trustee of the Z II Trust. The total of the claim as pleaded is some
£42,500,000 but taking a very pragmatic view, Equity has agreed to limit
its claim to £2 million, being the upper limit of its estimated irrecoverable
costs on the basis, as I understand it, that this sum should be ring-fenced.
9.
Equity asserts
that in correspondence between legal advisors Volaw had agreed to ring fence £2
million of the assets of the Z II Trust to meet this potential claim and I will
comment on this in a moment. What
is clear, looking at the balance sheet of the Z II Trust, is that there are no
readily identifiable liquid assets which are capable of being ring-fenced. The balance sheet shows in summary:-
(i)
Current
assets of some £250 million comprising loans due by the Z III Trust,
which is itself insolvent, of some £187 million and monies receivable
under what is described as an investment management agreement, whatever that
is, which the accounts say are unlikely to be recovered;
(ii) As against this it has loans payable to a
number of entities in the sum of £275 million and creditors, mainly
Volaw, of just over £1 million.
10. Equity is concerned to ensure that it’s asserted
equitable lien over the assets of the
Z II Trust are not, in the words of Justice Beriton in Lemery Holdings Pty
Limited-v-Reliance Financial Services Pty Limited [2008] NSW SC 1344 at
paragraph 50 “destroyed, diminished or jeopardised”. In
its view the appointment of a non-resident
trustee would make enforcement of its rights under the indemnities and under
its separate equitable lien more
difficult.
11. I was shown the correspondence between Advocate
Jordan for Equity and Advocate Young and Mr Robert Christensen for Volaw in
relation to this issue of ring-fencing.
Advocate Jordan at the hearing made it clear that Equity was not seeking
specific performance of any alleged contract to ring-fence assets but does seek
an acknowledgement of Equity’s equitable lien over the assets of the trust. It seems tolerably clear to me that at
the time of this correspondence the balance sheet of Z II Trust was as I have
just set out and there were no assets that could have been ring-fenced. Volaw were clearly therefore looking to
provide that ring-fencing from elsewhere.
12. Advocate Jordan addressed me helpfully on the
issue of whether Jersey law recognises the existence of a former
trustee’s equitable lien as
Advocate Renouf for C had not conceded its existence. Advocate Jordan relied upon the recent
decision of the Guernsey Court of Appeal in Investec Trust (Guernsey)
Limited-v-Glenalla Properties Limited and Ors [2014] (29th
October, 2014) Guernsey CA. That
case concerned a Jersey proper law trust with Guernsey former trustees against
whom the joint liquidators of a number of BVI companies were seeking repayment
of loans. The Guernsey former
trustees sought declarations that pursuant to Article 32 of the Trusts
(Jersey) Law 1984 they had no personal liability and had a right of
indemnity from the current trustees, as it happens, R&H Limited. With the agreement of counsel in that
case the Court of Appeal, which comprised James McNeill QC, John Martin QC and
Robert Martin QC, construed Jersey law as if it were construing a statute of
Guernsey (see paragraph 22). In
construing Article 32, the Guernsey Court of Appeal held that a trustee who has
transacted has a right to be indemnified by a subsequent trustee out of and up
to the limit of the trust assets held by the latter. Quoting from paragraph 34 – 37 of
the judgment:-
“34. The existence of a right in favour of the earlier
trustee to be indemnified by his successor trustee up to the limit of the trust
assets held by the successor may be characterised as an equitable right, in the
form of, or analogous to, a non-possessory lien. In respect of English law, the learned
authors in Lewin on Trusts, 18th edition (2008), at paragraph
14-59, discuss the continuance of an ongoing trustee’s rights of indemnity
after the appointment of new trustees.
In particular they state:
“The trustee’s rights
of indemnity go further than simply giving him something like a common law lien
which is dependent upon the ability to exercise legal control. The rights of indemnity give him a
proprietary equitable charge over, or equitable interest in the trust property,
and there is no reason why this charge or interest should disappear upon the
appointment of new trustees.”
The authors then go on to
distinguish between a situation where trustees have distributed assets to
beneficiaries, in which case that “should be taken as releasing any
equitable rights”, and a situation where new trustees are appointed, in
which case there is “no reason to take the outgoing trustee as giving up
his rights of indemnity merely because new trustees are appointed.” In support of the existence of an
equitable interest in the trust property, the authors refer to paragraph 21-33
in which they state that a trustee “has a first charge or lien upon the
trust fund, conferring an equitable interest”, and for that latter
proposition they cite as authority Jennings v Mather [1901] 1 KB 108, at
pp113-114, and sup cit, at pp 6 and 9.
35. As
far as Jersey is concerned, the possible existence of such an equitable right
was considered in the case of In re Esteem Settlement where the Deputy
Bailiff of Jersey (Birt DB, as he then was) held that the law of Jersey
recognises a form of equitable right which is available in circumstances where
that is required so as to allow an interest in property to be enforced; see
[2000 JLR 119], the judgment at pp136-141, and [2002 JLR 53], the judgment at
paras 89 and 90.
36. Whilst
we acknowledge immediately that the circumstances which were considered in the
case of In re Esteem involved criminal conduct, and that is to be
distinguished from the issue which is before us, nevertheless we are satisfied
that we may find that within the law of Jersey there is a form of equitable
remedy which would justify an earlier trustee who had disposed of assets to a
successor trustee having an entitlement to recover such of those assets as is
necessary for the purpose of satisfying a claim which has been established
under Article 32(1)(a). There are
three reasons why we have reached this conclusion and we would regard it as
being consistent with what was said by the Deputy Bailiff (who is the present
Bailiff of Jersey).
37. In
the first place, and as we have already observed, it may be said to be an
implied consequence of sub-paragraph (1)(a) of Article 32. That paragraph refers to “the
trust property” without qualification, and whether such property remains
in the hands of an earlier trustee or has been transferred to a subsequent
trustee, does not affect its status as trust property. Secondly, we are satisfied that the law
of Jersey as described by the learned Deputy Bailiff in In re Esteem is
sufficient to acknowledge a form of equitable interest where that is justified
in the context of trusts. If it
were not to be recognised in circumstances such as the present, it could mean
injustice both to an earlier trustee, who could not gain access to the extent
of all of the trust assets necessary to satisfy his claim. Thirdly, what is said by the learned
authors in Lewin is consistent with this. We are therefore satisfied that in the
present circumstances the former trustees have a right to obtain access to any
of the trust assets held by the present trustee insofar as that may be
necessary in order to satisfy a claim which is properly justified in favour of
the BVI companies.”
13. Advocate Renouf made the point that this
judgment is not binding on the Royal Court and technically that is the case but,
when pressed, he did not seriously suggest that a decision of such a closely
connected senior court should not be followed. In my view that decision does reflect
the law of Jersey and accordingly Equity, as a former trustee, does have an
equitable right in the sense described by the Guernsey Court of Appeal in Investec
and is entitled to ensure that Volaw and Barclays do not take steps which will “destroy,
diminish or jeopardise” that right. That equitable right will, of course, only extend to the liabilities for which Equity
would have been entitled to reimbursement out of the trust fund if it had remained
trustee i.e. liabilities reasonably incurred in connection with the trusts and
both Volaw and Barclays have reserved their position in this respect. It may well be that creditors of the trusts
may wish to do the same.
14. My impression from the extensive papers placed
before me is that Equity’s rights as a former trustee have not been fully
acknowledged, possibly as an understandable consequence of the antagonism that
exists between it and the family and I feel it would assist resolution of this
matter if its rights were to be fully acknowledged. In the absence of any agreed ring-fencing
it would seem that its equitable rights extend
to all of the assets of the Z II and III Trusts.
15. Advocate Jordan went on to submit that
Equity’s equitable rights constitute a first charge or lien upon the trust funds in priority not
only to the beneficiaries but also to the other current creditors of the trusts. The Guernsey Court of Appeal in Investec
refer to this in the passage I have quoted above citing Jennings-v-Mather
(1901) 1 QB 101. As Advocate Cushing
pointed out the creditors of the Z III Trust might well wish to argue this
point (in relation to Equity’s claim against that trust) at the hearing
fixed by Barclays on 27th February, 2015, when it will be seeking
further directions in relation to the Z III Trust. I think it right therefore that I should
delay determining this point until I have heard any contrary arguments that may
be put.
16. I would however make this initial
observation. It is tolerably clear,
it seems to me, that a trustee’s equitable right takes priority over the
claims of the beneficiaries (see Lewin on Trusts 19th edition
para 21-043). The issue of priority
over other creditors is not straight-forward. As previously mentioned, there are in
law no creditors of the trust. The
liabilities are those of the current and former trustees. Whilst I have not investigated the
matter it may well be that some of the loans referred to in the accounts of say
the Z II Trust were taken out by Equity when it was trustee. The current and former trustees
therefore all have equitable rights in respect of the liabilities, costs and
expenses they have each incurred, and in the case of the Z II and the Z III
Trusts liabilities which exceed the assets of those trusts. In the case of a deficiency is it the
case that Equity has priority for its liabilities as a former trustee over
Volaw and Barclays for their liabilities as current trustees? This will require detailed submissions in
due course if agreement cannot be reached.
17. I can however assist the administration of the
trusts, other than the Z II and III Trusts over the assets of which Equity has
equitable rights. Barclays and
Volaw took the view, I think not unreasonably, that Equity should be a party to
the DORAs in order to confirm that its contractual rights, which are of course
quite separate from its equitable rights, have been preserved and Volaw and
Barclays discharged from any liability under clause 5(2) in that respect. Equity accepts however, and I agree,
that as a matter of law, Equity need not be a party to the DORAs provided that
R&H does indemnify it in the same terms, mutatis mutandis, as set out in clause 5. That could be done by R&H in the
DORA waiving any rights it may have or be able to claim under any rule of law
relating to privacy of contract in order to avoid its liability or obligation
to indemnify Equity. I had in mind
that R&H would execute a separate document addressed to Equity in which it
would give the indemnities required.
However it is done, I am prepared to declare that if an indemnity is
given by R&H to Equity in the same terms, mutatis mutandis of clause 5 of each of the DORAs (including the
provisos) and without Equity being a party to it, then Volaw and Barclays, as
the case may be, will have discharged their obligations under clause 5.2, so
that pursuant to clause 5.3 their liability will be limited to the trust funds
remaining in their possession or under their control from time to time. I am happy to have counsel’s input
on the precise wording of that declaration which we can deal with in due
course. As I understand it such a
declaration would enable the appointment of R&H as trustee of the Z Trust
and the Z IV, V, VI, VII and VIII Trusts to proceed.
18. That is as far as I think I can properly go at
this stage. I am not prepared to
order Equity to enter into any contractual document which governs its rights
personally; apart from doubting the Court’s power to make such an order
it is unnecessary. I would hope
that Equity’s claim over the assets of the Z III Trust can be resolved by
negotiation as it is a relatively small sum and there would appear to be cash
assets there which could meet it.
The position in respect of the Z II Trust is, I acknowledge, more
complex and I must leave it to the parties to try and resolve it by
negotiation. Equity can only
exercise its equitable rights over the assets that currently exist and it does
seem that its constructive suggestion of ring-fencing is just not possible to
achieve. I would have thought it
would be possible that the appointment of R&H as new trustee of the Z II
Trust could be achieved in such a way that Equity’s existing contractual
and equitable right, to the extent
that they are enforceable, are both acknowledged and not in any way
jeopardised.
19. The issue of costs will be left over.
Authorities
Lemery Holdings Pty
Limited-v-Reliance Financial Services Pty Limited [2008] NSW SC 1344.
Investec Trust (Guernsey)
Limited-v-Glenalla Properties Limited and Ors [2014] (29th October, 2014)
Guernsey CA.
Trusts (Jersey) Law 1984.
Lewin on Aspects of Sentencing in the
Superior Courts of Jersey 19th Edition.