Recent Jersey Trust Cases

Kerry Lawrence Ogier Partner Commercial and Trust Litigation 16 February 2006

Recent Jersey Trust Cases

It is well known that Jersey is a vibrant offshore jurisdiction - bank deposits in Jersey now stand at around £180 billion ($312 billion), n...

It is well known that Jersey is a vibrant offshore jurisdiction - bank deposits in Jersey now stand at around £180 billion ($312 billion), net assets of funds under administration reached almost £122 billion in 2005 and the total value of funds under investment management now stand at around £43 billion. The trust industry in Jersey is one of the best developed in the offshore world and the calibre of the Jersey courts means that increasingly the cases decided in Jersey represent the latest judicial thinking on a trust issue. Below are summaries of some recent cases. They variously address the Jersey Court’s approach to a court of another jurisdiction making rulings about Jersey trusts, illustrate the Hastings Bass principle in action, and demonstrate the limits of the remedy of rectification. In the matter of CI Law Trustees Ltd v Minwalla [2005] JRC 099 Facts - The facts of this case are straightforward. Mr and Mrs Minwalla were embroiled in a hotly contested divorce in the English High Court. The trustee of a Jersey trust, established for the benefit of the husband were served notice of an application by the wife in those proceedings. Given the nature of the orders the wife was seeking from the High Court, it was apparent the wife was alleging the trust was a sham. The trustee entered an appearance and informed the court that it would rest upon the court’s wisdom. It was evident from the judgment that the court was unimpressed by the conduct of the wealthy husband and of the Jersey based trustee. It was held by the High Court that the trust was a sham and that effectively the assets of the trust should be transferred to the wife. The trustee then applied to the Royal Court for directions as to how it should respond to the High Court judgment. Held - The Royal Court drew a distinction between a situation where an English matrimonial court rules that a Jersey trust is a post-nuptial settlement (as in Compass v Barnett 2002 JLR 321) and purports to vary the settlement, and a situation where, as here, the court, applying English law, seeks to declare a Jersey proper law trust a sham. The Royal Court said that as a matter of generality, it would not look favourably upon an attempt by a foreign court to declare a Jersey trust a sham. However, in this case, the trustee had had an opportunity to defend the trust in the English proceedings and had failed to do so and furthermore it was apparent that the husband had been found to have acted less than transparently and fairly in his conduct of the matrimonial proceedings. For those reasons principally, the Royal Court held, that on the principle of comity the High Court judgment should be upheld and the trustees ordered to transfer the assets of the trust to the wife. Comment - The case is significant because the trustees submitted to the jurisdiction of the English Court. If they had not done so, the case may have been decided differently. When faced with a summons to appear in a foreign court in which an allegation of sham is being made, trustees should seek directions from the Royal Court rather than to enter an appearance and then rest on the wisdom of that foreign court. In the matter of the Toland and Star trusts [2005] JRC 142 The Toland Trust was a discretionary settlement. Clause 8 of the deed permitted the trustee to appoint income or capital to any other trust in which any one or more of the beneficiaries had an interest “provided that no interest thereunder is capable of vesting in interest later that the expiration of the Trust Period”. To avoid capital gains tax the trustee established the Pennywise Trust. Unfortunately the terms of the Pennywise Trust provided for a trust period which exceeded that of the Toland Trust. The result was that any appointment to the Pennywise Trust would infringe clause 8. The Sequential Trust was later established, again to avoid capital gains tax, but suffered from the same flaw as the Pennywise Trust in that it included terms which infringed on clause 8. The trustee sought a declaration from the Court that appointments to the Pennywise Trust and the Sequential Trust were in excess of the powers of the Trustee. It also sought to set aside certain exclusions of beneficiaries which had been made as part of the overall scheme, in the belief that the appointments to the two new trusts were valid. The Court agreed the appointments to the new trusts were in excess of the trustee’s powers and should be set aside pursuant to the Hastings Bass principle (which had been first applied by the Royal Court in the Green GLG case in 2002 and which states in summary that the Court will set aside the action of a trustee if (a) what it had achieved was not authorised by the power conferred on it or (b) if it was clear that it would not have taken the action if it not had ignored relevant considerations or taken into account irrelevant considerations). Whilst prima facie the exclusions were not themselves ultra vires, the Court accepted the powers were exercised as part and parcel of the overall ultra vires scheme and the trustee would not have excluded the beneficiaries had it understood the true position. The trustee was ordered to pay the costs of and incidental to the application on an indemnity basis. Comment - The case is another good example of the Royal Court’s pragmatic approach, this time applying the Hastings Bass principle. The court chose not to say whether they found the appointment to be void ab initio or merely voidable, a question often discussed in these Hastings Bass decisions. In the matter of the Sesemann Will Trust [2005] JRC 151 In 1997 the trustee of the Re Sesemann Will Trust made a Deed of Exclusion (“The 1997 Deed”) which excluded the settlor from benefiting from the Trust. The purpose of such exclusion was to avoid U.K. income tax liability. The trustee received advice that in accordance with section 660A(ii) of the Income and Corporation Taxes Act 1988 it was arguable that the settlor’s spouse must also be excluded in order to prevent income being deemed to be for his benefit. The trustee applied to the Court to rectify the 1997 Deed. The Court held that the test for rectification was well established: (i) if a settlement or other instrument is properly made but, by mistake, does not represent the intention of the maker, the Court may rectify it to reflect the settlor’s true intention; (ii) the remedy of rectification is discretionary and the Court must be satisfied that there is the highest degree of probability that the mistake is genuine. This burden will be harder to satisfy with the passing of time; (iii) there must be full and frank disclosure of all relevant information; (iv) rectification will not normally be ordered if another remedy is available; (v) there is no rule that rectification will not be allowed if its purpose is to save tax. The Court held that, whilst it could rectify a document which did not reflect the transaction which the parties had intended to achieve, it could not use rectification as a method of allowing the parties to achieve some other transaction which, in hindsight, would have been more desirable. The objective of the 1997 Deed was to achieve the result that the income of the trust fund could not be attributed to the settlor for U.K. income tax purposes and the intended method for achieving this end was to exclude the settlor absolutely from benefit. Therefore, the 1997 Deed could be said to have achieved the intention of the parties. The Court refused to rectify the 1997 Deed merely because the parties now wished to draw up a different document. Comment - As this case demonstrates the remedy of rectification is not a panacea for every error. In some situations, the Hastings Bass principle might afford a remedy where rectification is not available, but in this case it was not pursued as an alternative, presumably because it could not be said the trustee would not have acted as it did had it not ignored relevant considerations. It would still have excluded the settlor, it is just that it would have taken other steps as well.

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