This article is a summary of a talk delivered at the Legal Week Trusts and Estates Litigation Conference in March 2007.
No offshore jurisdiction that wishes to be taken seriously will hold itself out as the ideal place to shelter ill-gotten gains or to squirrel away assets behind opaque legislation. However, the trust is the quintessential "asset protection" device in the sense that it has been used successfully for centuries as a way of preserving and planning estates. By "asset protection" in this context, I mean to refer to the legitimate uses of offshore trusts for estate preservation and planning which will attract growing interest with the emergence of new wealth. The history of this success in personal estate planning has led to innovative commercial uses, which have been given statutory life in, for example, the STAR legislation in the Cayman Islands and the VISTA legislation in the BVI. The efficacy of Cayman Islands trusts, and their increasing popularity, owes a great deal to the approach to resolving disputes affecting Cayman Islands trusts, as reflected in the legislative framework and the judicial approach.
The Caymanian approach is underpinned by the notion that it is sensible and appropriate to aim to achieve a compromise between, on the one hand, the rights of an individual to protect his assets from future and unknown creditors and, on the other, the rights of legitimate creditors to pursue their claims. This requires the legislators and the judiciary (in interpreting and applying the legislation) to achieve a fine balance between these competing imperatives. The objectives of international crime fighting and anti-money laundering initiatives also have to be put in the scales.
The decisions of the Cayman Islands Grand Court and Court of Appeal demonstrate that a large part of the reason for the jurisdiction's success has been the ability to achieve this balance. This article will examine the Caymanian approach in two recent cases.
The legislative Framework
Legislative equilibrium has been achieved in the interplay between the foreign element provisions of the Trusts Law on the one hand, and the creditor protection provisions in the fraudulent dispositions and bankruptcy legislation on the other. Section 90 of the Cayman Islands Trusts Law (2001 Revision) provides that all questions affecting a Cayman Islands trust are to be determined according to Cayman Islands law. Section 91 provides that foreign law in relation to the validity of the trust or rights, claims or interests arising by virtue of a personal relationship with the settlor, or by way of heirship rights, will not invalidate a Cayman law trust.
The Fraudulent Dispositions Law 1989 provides that every disposition of property made with an intent to defraud and at an undervalue shall be voidable, within 6 years of the disposition, at the instance of a creditor thereby prejudiced. Under the Bankruptcy Law (1997 Revision), if the settlor of a trust commits an act of bankruptcy within the Cayman Islands, he may be made bankrupt within 6 months and transactions at an undervalue can be set aside by the trustee in bankruptcy if they occurred within a prior period of 2 or 10 years.1
The Judicial Approach
There has been a consistent message from the Cayman courts that the judicial attitude is in tandem with the legislative intent. Two clear examples of this emerged in the early nineties. In Re Lemos, the court limited disclosure of documents to a beneficiary who was at the time asserting a challenge to the validity of the Cayman trust in Greece under the forced heirship rules. In Re Ojjeh, the court made a declaration approving the Trustee's past decisions to restrict disclosure of commercially sensitive information concerning the large network of immensely valuable companies held in the trust. The court also authorised the Trustee to intervene in proceedings in France concerning the guardianship of a minor beneficiary, because, as the judge said "In the resolution of those matters there, the concept of the trust as an entity apart from the free estate of the settlor and the importance of the protection of the trust interests are matters which may have been overlooked, as the trust concept is foreign to civil law."
In Re H  CILR 237, the question was whether the trustee of a Cayman Islands trust should disclose information about the assets held on trust in response to a subpoena issued by a grand jury in Pennsylvania in proceedings against the settlor. Smellie J (as he then was) said that "The trustee… owes fiduciary obligations not to divulge that information except in accordance with Cayman law which governs the trust…"… "If validly constituted, the trust holds property independently of its settlor. That pivotal issue of validity remains to be decided…as a matter of Cayman law, which governs the trust. While that pivotal issue remains to be decided, it would be contrary to public policy and an unwarranted negation of the applicant's duty of confidentiality owed as trustee, to direct that he should give into evidence confidential information in criminal proceedings which, as a matter of Cayman law, may yet come to be regarded as misconceived".
Recent Cases (1): Foreign Bankruptcy Orders
In Re Al Sabah [2004-2005] CILR 373, the Privy Council held that section 122 of the Imperial Bankruptcy Act 1914 applied in the Cayman Islands, with the result that the courts of one British territory are required to provide assistance to each other in matters of insolvency and bankruptcy. The case came about as a result of a massive fraud committed by Sheik Al Sabah. The victim, Grupo Torras SA, obtained a default judgment in England in the amount of approximately US$800 million . The effects of this were felt around the offshore world, and tested the mettle of the courts in the Bahamas, Jersey and the Cayman Islands in particular. The Sheikh, who was resident in the Bahamas, was declared bankrupt there in June 2001. The Bahamian court appointed a trustee in bankruptcy. The Sheikh had settled two trusts governed by Cayman Islands law (the governing law of one changed from Bahamian to Cayman Islands law in 1993). The Bahamian court issued a request to the Cayman Islands court seeking assistance in recognising the Bahamian trustee and giving him all of the powers available to a trustee in bankruptcy under Cayman Islands law.
The effect of the application of section 122 was that the Bahamian trustee could be armed with the avoidance provision under section 107 of the Bankruptcy Law and could seek to set aside the Cayman Islands trusts. The Privy Council emphasised that the court has discretion and approved the Court of Appeal's reasoning concerning the scope of that discretion. As a result, it is likely that the following factors (which were highlighted in the judgment of the Cayman Court of Appeal) will be relevant in considering a future exercise of the discretion either to recognise the foreign trustee or to permit him to advance a claim under section 107:
- The court is to perform its normal function of seeking to do justice in accordance with the law;
- Principles of private international law are to be taken into account: e.g. was the debtor properly subject to the jurisdiction of the court which made the bankruptcy order?
- The facts of the case will obviously be important. Here the proceedings resulted from a massive fraud and the court was entitled to have regard to the position of the victim of the fraud as the petitioning creditor.
- Consideration of the purposes of having the trusts governed by Cayman law, and of the location here of those with legal title and control of the assets will also be important. The primary question was whether the connections between the settlements and the jurisdiction are enough to justify the application of the Cayman avoidance provision.
Indirect Enforcement of Revenue Laws
In a judgment delivered in January 2007, in Wahr-Hansen v Compass Trust Co Limited, Henderson J confirmed the seminal principle that the Cayman Islands courts will not assist in direct or indirect enforcement of the revenue laws of another territory. He went on to consider what would constitute indirect enforcement in the circumstances of the particular case; in other words, what are the factors which will lead a court to characterise a claim as an indirect attempt to enforce foreign tax?
The claim was advanced by Mr. Wahr-Hansen in his capacity as the executor of the estate of Mr. Anders Jahre. The principal creditor of the estate was the Norwegian Revenue, as a result of a posthumous assessment of Mr. Jahre's tax liability in the amount of US$125 million. There was one minor creditor which had essentially been paid off by the Norwegian Ministry of Justice.
Henderson J confirmed that there are three prerequisites:
- That there exists and unsatisfied tax claim; and
- That the proceeds of the litigation will go to the foreign tax authority; and
- That the claim is in substance an attempt to collect foreign tax.
There was no dispute that there was an unsatisfied tax claim, and Henderson J found on the evidence that the proceeds of the litigation would go entirely to the Norwegian revenue.
The central question was the third one, and the judge took the view that it boiled down to a question of control. Henderson J distinguished the cases of Buchanan and QRS where in substance the claimant was the foreign tax authority in liquidator's clothing. In those cases, the only existing creditor was the revenue and the liquidator was funded by the revenue and required to act in its interests alone. According to Henderson J, "This is the degree of control which has resulted in a liquidator, notwithstanding court supervision, being described as a nominee or puppet of the revenue".
InWahr-Hansen, the Probate Court and the administrator were required under Norwegian law to give primacy to the interests of the heir of the estate. All significant decisions were ultimately to be made by the Probate Court, which had on several occasions made orders contrary to the express wishes of the administrator and the Revenue. In other words, the "Probate Court exercised a significant degree of control and supervision….exceeding the level of supervision ordinarily exercised over a court appointed liquidator". In addition, the defendants in the Cayman proceedings were third parties and the claims advanced were proprietary in nature.
The case essentially turned on these unique features. Of general interest is the confirmation that where the claim is a proprietary claim, advanced independently of the revenue authority, it is unlikely to be disallowed, but where the claim is in substance one for the recovery of tax, it will be disallowed.
With renewed interest in the use of offshore trusts, the Cayman Islands courts are likely to continue to grapple with difficult questions concerning the balance which the legislation seeks to achieve.
1. The avoidance provision can be invoked within the extended ten year period if the beneficiaries are unable to prove that, at the time of settling the trust, the settlor was unable to pay his debts from his remaining assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.