Foundation Application Achieves Success with Order by the Supreme Court

Private foundations can be viewed as a hybrid of companies and trusts, combining the best asset protection elements of each; and serve as an essential tool for international practitioners in the private wealth management field. The Foundations Act (the “Act”) of The Bahamas was enacted in October 2004, enabling the creation of private foundations in the jurisdiction and making The Bahamas one of the first common law jurisdictions to enable private foundation.

In the time since the enactment of the legislation, the use of foundations has grown steadily in the Bahamas’ financial services industry.  While the use of foundations has grown however, there has been no case law reported in respect of its provisions. Despite there being a paucity of reported decisions from the courts of the Bahamas considering the provisions of the Act from which guidance could be derived; the Bahamian foundation has nevertheless been strengthened by the industry’s use of the Courts to address and resolve various administrative matters concerning Bahamian law-governed foundations. In particular, the assistance of the Court has been sought concerning the amendment of a foundation’s constitutive documents following its re-domiciliation to the Bahamas.  Below is a brief consideration of the provisions of the Act enabling amendments to foundations governed by Bahamian law.

A foundation established in 2004 under laws of a jurisdiction outside the Bahamas, was re-domiciled to The Bahamas (the “2004 Foundation”).  Following the continuation of the 2004 Foundation, certain changes were sought to the constitutive documents. Unfortunately, the provisions of the charter for the 2004 Foundation were unclear on whether and to what extent the foundation council, which had been given control of the foundation, had power to amend its provisions, while the provisions of the articles appeared to prohibit any amendment of its provisions. However, the Act, which was applicable to the foundation after its re-domiciliation, contains an extensive section addressing the amendment of a foundation’s constitutive documents.   

Section 50 of the Act permits amendments to be made to the constitutive documents of a foundation.  In particular, subsection (2) of the section allows amendments to be made to the charter prior to the registration of a foundation under the laws of The Bahamas.  Subsections (7) and (9) of section 50 enable amendments after a foundation has been registered under the Act.  Subsection (7) endorses amendments pursuant to an amendment provision contained in the charter while subsection (9) enables amendment applications to the Supreme Court.

Although power existed pursuant to section 50(2) to make amendments to the 2004 Foundation prior to the re-domiciliation and registration process under the Act, it was not determined until after the 2004 Foundation had been re-domiciled and registered that amendments were warranted. Accordingly, the post registration provisions under section 50 had to be considered. 

As to amendments after registration, section 50 of the Act provides:

“(7) After the registration of a foundation where … the charter of a foundation makes provision for the amendment of the charter after registration, the charter may be amended in accordance with that provision and the procedure contained in subsection (8).

…

(9) In the event that it is not possible to comply with the relevant provisions of this section in respect of the amendment of a charter of a foundation because … (c) no provision was made in the foundation charter for amendment of the charter after registration, the officers of the foundation may resolve on such amendments as are necessary in the circumstances to maintain the objects of the foundation and shall submit the resolution containing such amendments to the court for approval”.

In the circumstances, the charter being unclear and the articles containing prohibitive language, the application to the Supreme Court of The Bahamas in 2018 on behalf of the 2004 Foundation was made pursuant to subsection (9).

It is accepted that a foundation is a hybrid of a trust and a company.  Accordingly, on that basis, it was argued for the 2004 Foundation that, similar to the position under company law regarding its memorandum and articles, the charter ought to be the primary document regulating the affairs of the foundation.  In support of this argument, reliance was placed on the decision of the Privy Council in HSBC Bank Middle East v Clarke [2007] 1 LRC 544, an appeal from The Bahamas.  In the HSBC Bank case, the Privy Council affirmed the primacy of a company’s memorandum of association in contrast with the subordination of its articles of association. It was further argued that the prohibition against amendment contained in the articles of the 2004 Foundation ought to be disregarded and the provisions of the charter considered for the purposes of the application under section 50 of the Act.

Consistent with the above arguments made on behalf of the 2004 Foundation on the supremacy of the charter, section 50(9) addresses only the amendment of foundation charters.  The subsection expressly permits an amendment to be made by a resolution of the foundation despite the absence of a power of amendment in the express provisions of the charter.  The resolution of the foundation is thereafter submitted to the court for its sanctioning and the ratification of the amendment. 

While the Court did not give reasons for its decision, the application on behalf of the 2004 Foundation under the Act was successful.  The resolution of the foundation, which amended the charter, and enabled the consequent amendment of the articles, pursuant to the provisions of subsection (9), was approved by an Order of the Supreme Court.

The organisation of the sections of the Act incorporates subsection 50(9) into the chapter regulating the amendment of foundations generally.  The section requires a foundation to first, by resolution, determine the amendments it wishes to be made and thereafter submit the resolution to be approved by the Supreme Court.  The ratification, or sanctioning, of the resolution and the decision undertaken by the foundation is similar to the second category of trustee applications cited by Hart J in Public Trustees v Cooper [2001] WTLR 901. 

The second type of trustee application includes non-adversarial applications to a court to bless a momentous decision by the trustee.  It would seem then that section 50(9), by allowing an amendment in the absence of an expressed power of amendment, is a modified statutory ratification of a momentous decision on the part of a foundation.  In such applications, the court, on a consideration of the particular circumstances underpinning the application, has to determine whether the exercise by the foundation, reflected in the resolution, was one which the court could authorise.  The section, permitting the amendment of foundations with the authorisation of the court, enables a foundation to obtain necessary amendments while providing protection to its officers or council in connection with the exercise of power.  The use of a resolution for amendment and the adoption of the application to sanction a momentous decision also echo the hybrid nature of foundations; part company and part trust, which section 50(9) weaves together seamlessly.

Thus, the flexibility and unique features of the Bahamas Private Foundation have been confirmed by the decision of the court. The Bahamas foundation truly combines the most effective asset-protection elements of both trusts and private companies; and, in having this dual nature explicitly referenced and reinforced by the Supreme Court, will remain among the most attractive vehicles of its kind in the international wealth management industry.

Sharmon Ingraham
Sharmon Y. Ingraham is a Partner and Deputy Chair of the Private Client and Wealth Management practice group at Higgs & Johnson. Her practice includes providing advice on matters concerning trust administration and creation, pension trust creation and administration, estate administration, private client wealth management, wills and probate matters, company law and international commercial contracts. She also has experience in trust, commercial and maritime litigation, ship financing and registration matters, and banking and insurance regulatory matters. Sharmon holds a dual honours degree in Law and International Politics from the University of Keele and qualified as a Barrister (non-practising) in England and Wales. She is a member of Middle Temple, the Bahamas Bar Association, STEP (Bahamas chapter) and a member of the editorial committee for STEP.