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Trustee protection Parslows International

Privy Council recognises Jersey trustee protection “free-standing” from contractual claims

The recent Privy Council trust judgment in Investec Trust (Guernsey) Ltd & ors v Glenalla Properties Ltd [2018] UKPC 7 concerned trustee protection proceedings issued in the Guernsey courts in relation to contractual claims by the liquidators of BVI creditors against the former, Guernsey based, trustees of the Jersey proper law Tchenguiz Discretionary Trust.

The creditors claimed against the former trustees which, in turn, sought an indemnity from the trust assets, itself resisted by the current trustees.

Key issue was whether or not former trustee personal assets had trustee protection

A key issue in this case was whether or not the former trustees’ own personal assets were protected from the creditors’ claims, so that the creditors’ recourse was only to the trust assets.

That required analysis of the effect of Article 32(1) of the Trusts (Jersey) Law 1984, which provides that, where a trustee is a party to a transaction or matter affecting the trust, and the other party knows that the trustee is acting as trustee, that party’s claims are restricted to the trust property.

The Board identified the distinction between English and Jersey trusts law created by Article 32(1).  It held that the Jersey legislation abrogated the rule of English law to the effect that the law looks no further than the legal entity which has assumed the liability.

In contrast, the Board held that Jersey law introduced a legal distinction between a trustee’s two capacities – personal and fiduciary, recognising the ability for a trustee to incur liabilities “as trustee” thereby denying third parties recourse to the trustee’s personal estate.

However, the creation of a direct right of action against the trust assets was not to be regarded as a corollary of that.  Instead, Jersey law did still subscribe to the rule of English law to the effect that a creditor may access trust assets only by way of the trustee’s right of indemnity.

Accordingly, a creditor would have no right to the trust fund, other than through its right of subrogation to any entitlement which the trustee might have under its indemnity from the trust fund.

It was the BVI creditors’ reliance on subrogation which the current trustees of the Tchenguiz Discretionary Trust sought to utilise as a means by which to prevent them having recourse to the trust funds.

The current trustees argued that the former trustees (and so in turn the subrogated creditors) were not entitled to rely on that indemnity because, while the liabilities to the creditors might have been reasonably incurred at the outset, the subsequent failure by the former trustees to seek to discharge them had been unreasonable.

This required analysis of a further provision of Jersey’s trust legislation – Article 26(2), which gives a trustee a right of reimbursement of all expenses and liabilities reasonably incurred in connection with the trust.  The Board did not accept the current trustees’ argument.  It concluded that availability of the statutory indemnity falls to be assessed when the liability for which the indemnity is sought is first incurred, not with hindsight having regard to subsequent events.  The current trustees’ assertion of unreasonable failure to discharge the liabilities should instead be pursued against the former trustees by way of an action for breach of trust.

The Board, however, determined that Article 32(1) did not have the effect of limiting the liability of a trustee in relation to the costs of legal proceedings, being liabilities personal to the trustee.  Further, that having the blessing of a Beddoes order would not protect a trustee from an award of costs against it personally, if its behaviour in the conduct of the litigation was unreasonable.

The Board’s conclusions as to the effect of these Jersey statutory provisions were not the end of the matter.  What relevance these Jersey law provisions should have, in Guernsey proceedings against Guernsey trustees in relation to BVI law governed contracts, was also a point in issue.  A matter determined by Guernsey private international law.

The creditors argued in favour of the “discharge rule”: that the extent of, (and limitation of), the former trustees’ liabilities should be decided by reference to the contractual liabilities, and that the law which governs the discharge of a contractual liability should be the same as the law of the underlying contract.

The Board however favoured the “status rule”: that questions as to the capacity in which trustees act, and the liability consequences which flow from that capacity, should be governed by the proper law of the trust of which they are trustees.

In relation to that, the Board recognised that the English courts had grappled with the conceptual problem of a foreign representative entity capable of suing or being sued in England, but which under foreign law created liability for its members only in a particular capacity.

In relation to that, the Board commented:

the time has come to recognise that as a general rule the common law will recognise and give effect to limitations of liability which arise under an entity’s constitutive law by reason of the particular status or capacity in which its members or officers assume an obligation.”.

The Board went on to confirm that it would not confine this rule to entities which have separate legal personality but would apply it to partnerships and associations of persons without legal personality and also a Jersey or Guernsey trust.

It is interesting to note that the Board’s decision was not unanimous, with Lord Mance and Lord Briggs dissenting on differing aspects of the majority’s conclusions.

Significant development | Trustee protection

The Privy Council’s recognition of two separate (personal and fiduciary) capacities of trustees of a Jersey trust has been perceived as a significant development.  Parties contracting with trustees of a Jersey proper law trust should be live to this recognition of a potential “free-standing” protection from contractual liabilities afforded to trustees, regardless of the contract’s governing law or the forum in which contractual obligations may be litigated.

If you require further information or trust advice please contact Mason Birbeck mason.birbeck@parslowsinternational.com

 

Trusts, Foundations & Private Wealth

Main contact: Mason Birbeck

Trusts, Foundations & Private Wealth

Mason Birbeck is an expert in Trust Law.  If you require any clarification on this briefing please contact him.