Changing times for Jersey and Guernsey trust laws

By Paul Buckle, Partner, Carey Olsen, St Peter Port, Guernsey (14/01/2007)

It is well known  that both Jersey and Guernsey are proposing quite significant changes to their trust legislation. In Jersey legislation, amending the Trusts (Jersey) Law 1984 (as amended) (‘the Jersey Law’) was approved by the Privy Council and adopted on 27 October 2006. In Guernsey a consultation paper proposing amendments to the Trusts (Guernsey) Law 1989 (as amended) (‘the Guernsey Law’) was released on 14 March 2006 and following comments from the industry, it is anticipated that a draft law will be put before the Guernsey States at some point towards the end of this year or the beginning of the next.

This article will focus on the most significant proposals and assess their significance. Whilst the partial objective behind the proposed changes is to plug one or two of the holes in the existing legislation, it is important to remember that neither the Jersey nor Guernsey Law is a complete code. The Islands’ courts will therefore continue to look to case law elsewhere for assistance on matters which the Laws do not cover.

 Another point to remember is that both islands are heavily dependent upon their finance industries. Certain of the proposed changes clearly have economic growth as much in mind as they do the rationalisation of the Islands’ trust laws generally.

Forced heirship

Both Islands propose introducing measures which are designed to extend the priority of local law over foreign law generally when determining the validity of trusts and the capacity of those creating them. The changes to the Jersey law also anticipate that foreign judgments in respect of Jersey trusts shall be enforceable only to the extent they are consistent with Jersey law generally.

Doubtless this is an attempt to clarify the basis on which foreign courts can make judgments which effect Jersey or Guernsey trusts. Readers may well be familiar with the decision in the Minwalla case in which an English court declared a Jersey trust a sham by applying English and not Jersey law to it. Whilst such a result is clearly undesirable for those who seek to establish trusts in Jersey and Guernsey, even the proposed changes to the Islands’ Laws are unlikely to rule out cases like Minwalla altogether. Foreign courts may always choose to accept jurisdiction, especially where assets are located there, and even the Jersey court itself has made it clear that it will recognise some foreign law judgments in Jersey if it is right to do so.

Settlor reserved powers

Currently neither Island’s Laws state clearly what powers the settlor may reserve for himself without jeopardising the validity of the trust. The proposals in both islands anticipate that changes should be made expressly permitting the reservation or grant of certain powers to a settlor.

The changes to the Jersey Law list possible settlor reserved powers, which include the power to revoke or vary the terms of the trust, to appoint and remove trustees, and to advance or pay income or capital. They also include the ability to give binding directions to trustees as to the retention or sale of investments.

The idea is that where a trustee acts in accordance with the exercise of a power granted to the settlor, the trustees shall not be in breach of trust, but there is clearly going to be scope for argument as to when exactly a trustee can be said to have ceased acting in accordance with a direction given, so that the trustee’s general duty to consider the exercise of its other powers will apply instead. Similarly the intended provisions do not say anything about the capacity in which the settlor holds the powers reserved. Whilst some powers are likely to be held in a beneficial capacity, and may be exercised in the settlor’s own interests, others, such as the power to appoint and remove trustees, are likely to be fiduciary in nature and will only be capable of being exercised in the interests of the trust.

Disclosure of information

One of the most topical issues for both islands remains the extent to which a trustee is obliged to give information to a beneficiary.

In Guernsey there are two distinct provisions which deal with this matter. Section 22 of the Guernsey Law gives beneficiaries, and indeed settlors, rights to information regarding the state and amount of trust property. However, the extent of this right can be limited by the trust deed. Section 33 on the other hand preserves the general rule that beneficiaries are not entitled to see the reasons for trustees’ decisions and the material on which those decisions were based, unless the court orders to the contrary. The Schmidt v Rosewood case, which has been seen as consistent with Guernsey law, has led to a proposal that section 22 be redrafted to make it clear that the terms of a trust may expressly exclude beneficiaries’ rights to information, but without prejudice to the overriding right of any beneficiary to apply to the court for disclosure. As to section 33, the proposal is that, following a decision of the Guernsey court in Bathurst (in which the judge awarded disclosure of a letter of wishes) documents, such as letters of wishes, which reveal the settlor’s or anyb eneficiary’s intentions as regards to the trust, should be excluded from disclosure, unless the court orders to the contrary.

Not all the changes to the Jersey Law originally proposed have found their way into the new legislation approved by the Privy Council. One example is the proposed redraft of Article 25 of the Jersey Law which deals with beneficiaries’ rights to information. The intention is for Article 25 to be expanded and clarified. The redrafted Article 25 provides, first, that a beneficiary or enforcer (the person charged with enforcing a Jersey Law noncharitable purpose trust) shall be entitled to all documents which form part of the trust accounts. That term has received a very wide interpretation in one or two Jersey cases, but there is no current intention to define it under the Jersey Law itself.

Also, the redraft adds new provisions such as making it clear when the Court can override the terms of the trust. The proposal is that the Court can so act where it considers that the terms of the trust do not render the trustees ‘sufficiently’ or ‘appropriately’ ‘accountable’ to the beneficiaries. Additionally the redrafts add a provision explaining that a trustee is still obliged at all times to inform a beneficiary that he or she is a beneficiary.

Trustee’s dealings with third parties

Both Jersey and Guernsey law have special rules with regard to how a trustee deals with a third party. In these cases the third party’s claim ‘extends’ only to the trust property, if it knows (through the trustee informing it) that it is dealing with a trustee.  If it doesn’t know, then the trustee is personally liable in the normal way for any liability, but will have a right of indemnity against the trust assets if the liability was properly incurred.

There are two potential problems here. One is the so-called ‘lacuna’ where a trustee has not informed the third party, but the third party still knows, it is acting as trustee. In that event it is not clear how the rules will apply. The second, and significantly more difficult, is the nature of the third party’s claim against the trust property. In other words, does the idea that the third party’s claim extends only to the trust property, mean it has a direct proprietary claim against the trust assets, or is it simply that the trustee is personally liable, but only to the extent of the value of the trust property?

The changes to the Jersey Law deal with the lacuna by, not surprisingly, saying that in the case where the third party knows but has not been informed that it is dealing with a trustee, its claim shall be against the trust property just as if the trustee had informed it. Nothing very clear is said about the more difficult point concerning the nature of the third party’s claim. In Guernsey, the point seems to have been ignored altogether as it did not feature in the consultation paper.

It is unfortunate that no attempt has been made to focus on the rather difficult implications of these rules. Not only has the nature of the third party’s claim been largely ignored, but also the much more difficult questions of priority of third party trust creditors (if as seems more likely on the current wording, the claim is proprietary) and the extent to which a trustee may remain liable if it deals with trust assets on notice of the third party’s claim.

Security for outgoing trustees

One of the most problematic areas of practice (and needlessly so) is the extent to which a trustee which has either retired or been removed is entitled to security from its successor (or anyone else for that matter) in respect of any liabilities which it may incur after its retirement or removal, but which arise by virtue of its having acted as trustee. Both Laws give outgoing trustees rights to ‘reasonable security’, and yet the Jersey and Guernsey practitioner sees indemnities covering breach of trust, chains of covenants stretching back as far as trustees who are no longer in business, and wholly unrealistic restrictions to the effect that the new trustee must secure an indemnity every time it pays out one penny of the trust fund.

Once the purpose of the local rules is understood, many of these problems should evaporate. This is that security should be available to the outgoing trustee for liabilities it can no longer recoup from the trust fund.

The Laws do not make this clear, but perhaps need not do so. The focus of the changes is to deal with problems in practice of the kind identified above. It is proposed (although again, the legislation in Jersey before the Privy Council has omitted this) that outgoing trustees be given a statutory non-possessory lien instead of their existing rights to reasonable security. The lien will remain even after transfer of the trust assets to a successor. Only a bona fide purchaser without notice will not be bound. On distributions to beneficiaries a trustee may expressly waive the lien, but if he does not, the beneficiary is also bound. It remains to be seen whether this change does away with the unusual problems associated with trustee changes. The feeling is it may not, as there will always be some risk, and the proposed changes are not such that it is mandatory for outgoing trustees to bear that risk.

Corporate trustee director’s liability

One of the most controversial proposals is the abolition of the rule in both islands that directors of trust companies, which commit a breach of trust, become personally liable as guarantors of the company’s liability. The purpose of that rule, which is something almost unique to the Channel Islands, is doubtless to avoid the situation where thinly capitalised trust companies are sued but have insufficient assets to meet judgment.

Both islands have introduced regulatory legislation which requires professional trustees to have insurance, and to be capitalised to certain prescribed levels. So,it is said, there is no need in addition for directors to remain personally liable. Also, it is argued, this very draconian sanction discourages those wanting to establish private trust companies in the islands.

There are a very small number of us who view these arguments as misconceived. The penalties for failure to observe the regulatory requirements are that a trust company will lose the right to carry on business. They are not that a beneficiary will get their money back. Also, it would have been very easy to make private trust companies not undertaking business an exception from the director guarantor rules if that was seen as such a problem. There seems little sense in removing the requirement for professional entities who after all, if as one would expect, are observing the regulatory rules, would be most unlikely to find themselves in a situation where personal liability on the directors would arise. Also what of the beneficiaries themselves? Surely the removal of protection is as much a disincentive for them to locate in the Channel Islands as it may be an incentive for trustees to carry on business here. Other jurisdictions may see this an opportunity.

Non charitable purpose trusts

In Guernsey new provisions are intended by way of addition to the Guernsey Law to make it clear that the island will recognise non-charitable purpose trusts. These are expected to mirror the existing rules in the Jersey Law.