A Guernsey Court of Appeal decision in 2015 had held that a creditor of a trustee may enforce a debt directly against a trust’s assets, even if the trustee has no right to indemnify itself from the trust in order to pay the debt.
Acting on behalf of the trustees of the Tchenguiz Discretionary Trust, in claims also involving the trust’s former trustees and the former trustees’ creditors, Babbé successfully overturned this aspect of the decision.
The firm argued that such an interpretation would prejudice the trust’s beneficiaries, deplete their interest in the trust and generally discourage the use of offshore trusts – posing a huge risk to the financial security of offshore jurisdictions.
In this case, high-profile property investor Robert Tchenguiz was a beneficiary of the trust; the settlor was the Tchenguiz Family Trust. The trust was governed by Jersey law but administered in Guernsey, and its then trustees were Investec Trust (Guernsey).
The creditors were four British Virgin Island (BVI) companies with a very substantial portfolio of investments which had been impacted by both the collapse of Iceland’s Kaupthing Bank and the credit crisis, and which sought to sue Investec for approximately £180m ($245m, €204m).
Potential backlash for trusts
The Court of Appeal’s decision had the potential for significant negative effects on the attractiveness of Jersey (and Guernsey) trusts.
Apart from potential tax advantages, one of the main purposes of settling assets into an offshore trust is to protect them from hostile creditors.
The Court of Appeal had interpreted the law in a manner which appeared to avoid established principles of asset protection, by finding that a creditor may attack trust assets notwithstanding that the assets were held by a trustee whose only right to rely on the assets in order to satisfy the creditor’s claim is via the trustee’s indemnity.
The Privy Council overturned this aspect of the Court of Appeal judgement, which will bring comfort to settlors that, in the event that a trustee unreasonably incurs a liability or acts in breach of trust (invalidating its indemnity), the assets in trust will still be protected from creditors.
Tremendous comfort
The Privy Council decision will prove to be of huge importance to settlors, beneficiaries and trustees across the offshore world but particularly those interested in Jersey and Guernsey law trusts.
Since the Court of Appeal’s judgement in 2015, there had been concern about the vulnerability of Jersey and Guernsey law trusts but this judgement will give tremendous comfort to those with an interest in those trusts.
The appeal hearing involved a point of law concerning Article 32 of the Trusts (Jersey) Law 1984.
In accepting Babbé’s clients’ arguments on the construction of Article 32, the Privy Council found: “The Jersey legislature plainly intended by article 32 to improve the position of trustees by insulating their personal assets from liabilities to third parties expressly incurred as trustees, and must have appreciated that this would have to be at the expense either of creditors or beneficiaries, or both.
“On the reasonably safe assumption that the legislature intended thereby to promote rather than damage the trusts industry in Jersey, and that its future prosperity would depend upon foreign settlors continuing to choose Jersey as the place for the establishment of their trusts, it seems very unlikely that a deliberate choice would have been made to improve the position of trustees at their beneficiaries’ expense.”
The judgment is good news for settlors, as well as for those working in the private wealth sector who are advising individuals looking to settle their assets into jurisdictions like Jersey or Guernsey.
They know that even if a fiduciary in the islands unreasonably incurs a liability or acts in breach of trust, the trust’s assets will still be protected from the trustee’s creditors.
Prior to the Privy Council judgement, the issue of trustee’s creditor’s rights was unresolved throughout the Commonwealth and it is one of critical, international importance.
The judgement will now be considered the leading authority when such matters are considered in other jurisdictions and will be highly persuasive in similar circumstances in other finance centres such as the Cayman and British Virgin Islands.
