Cayman Islands: Confirming Established Principles

Last Updated: 1 July 2010
Article by Martin Livingston, Colin McKie, QC and Nigel Porteous

Offshore trusts have long been used as a vehicle for estate planning and wealth management, providing shelter from economic, political, family and business uncertainty. An important objective in creating such trusts is the protection of the interests of the settlor and other beneficiaries against creditors, in particular creditors of the settlor. This article considers some recent case-law developments in the Cayman Islands where a judgment creditor of the settlor of Cayman Islands trusts sought to enforce his judgment against trust assets via a power of revocation vested in the settlor.

Legal background

Under Cayman Islands law, subject to any expressly reserved power – such as a power of revocation or amendment – once a trust is completely constituted it is binding and irrevocable. Powers of revocation and/or amendment are commonly included in trusts drafted under Cayman Islands law. In particular, a power of revocation is typically reserved to the settlor to enable them, at some future date during their lifetime, and for any reason, to cause the trust fund (or part of it) to revert to them. Powers of revocation or amendment are typically drafted so that these powers are personal to the settlor, ie are not fiduciary powers. See, for example, Smith Barney Private Trust Company (Cayman) Ltd v Cebreros & ors [2006].

Generally speaking, a solvent settlor may create and settle their assets on Cayman Islands trusts for legitimate purposes, without the fear of such assets being vulnerable to creditors. This principle is subject to a number of well-known exceptions, such as where the settlor creates the trust as a sham, or where the settlor has already incurred the liability or contingent liability and seeks to use the trust to defraud a creditor by placing assets beyond reach. Subject to certain statutory provisions such as the Cayman Fraudulent Dispositions Law (1996 Revision) and the Cayman Bankruptcy Law (1997 Revision), such dispositions of assets are void or voidable under Cayman Islands law. This was examined in the decision of the Privy Council (on appeal from the Court of Appeal of the Cayman Islands) in Re Al-Sabah [2004-5]. Mr Al-Sabah settled assets in two Cayman Islands trusts. He was subsequently bankrupted in the Bahamas. It was alleged by his Bahamian trustee in bankruptcy that he had settled assets on the trusts when he was insolvent. The Bahamian court issued a letter of request to the Grand Court of the Cayman Islands seeking the recognition of the trustee in bankruptcy in the Cayman Islands, so he could apply to the Grand Court to avoid the trusts under s107 of the Bankruptcy Law.

Another remedy available to a creditor of the settlor is to bankrupt the settlor. Under s100(b) of the Bankruptcy Law, when the settlor becomes bankrupt the settlor's trustee in bankruptcy will be vested with:

... the capacity to exercise... all such powers in or over or in respect of property as might have been exercised by the debtor for his own benefit at the commencement of the bankruptcy, or at any time previous to his discharge.

The trustee in bankruptcy will therefore be able to exercise a power of revocation that is vested in the settlor, and so cause the trust assets to fall into the bankrupt's estate. However, the obvious disadvantage to the settlor's creditor of proceeding in this way is that they will have to share the proceeds pari passu with the settlor's other unsecured creditors.

Tasarruf

The Cayman Islands courts have recently examined whether a judgment creditor – Tasarruf Mevduati Sigorta Fonu (TMSF) – could enforce its money judgment against a settlor of two Cayman Islands trusts – Mr Demirel – by appointing a receiver by way of equitable execution over a power of revocation vested in Mr Demirel, with a view to the receiver executing the power of revocation and paying the proceeds to TMSF. If this remedy were available it would mean that a judgment creditor of a settlor may be able to achieve a similar result to that achievable by a trustee in bankruptcy, but without having to share the proceeds with other unsecured creditors of the settlor.

The background was as follows. From 1997 to 1999 Mr Demirel settled substantial assets on Cayman Islands trusts. The assets of the trusts now comprise US$27m. The trustee in each case is Merrill Lynch Bank and Trust Company (Cayman) Ltd. Each trust deed reserves to Mr Demirel a power to revoke the trusts (the terms of which are fairly typical). The powers are personal to Mr Demirel.

In 2001 the Turkish courts entered judgment against Mr Demirel for US$30m. TMSF sued Mr Demirel in the Cayman Islands courts on the Turkish judgment debt. After a contested hearing TMSF obtained summary judgment in the Grand Court against Mr Demirel for US$30m: see TMSF v Merrill Lynch Bank and Trust Company (Cayman) Ltd & ors [2008]. The Court of Appeal dismissed Mr Demirel's application for permission to appeal against the summary judgment. TMSF then sought to enforce the summary judgment by applying to the Grand Court for the appointment of receivers by way of equitable execution over the powers in the Cayman Islands trusts. The trustee, which we represented, resisted the application on the basis that the Grand Court lacked jurisdiction to appoint such receivers over the powers of revocation. Mr Demirel also resisted the application.

TMSF's argument was:

  • The statutory power to appoint receivers by way of equitable execution in the Cayman Islands is contained in s37(1) of the English Supreme Court Act 1981, which is incorporated into Cayman Islands law by s11(1) of the Grand Court Law (2006 Revision).
  • The Grand Court should follow Masri v Consolidated Contractors International SAL [2009], in which the English Court of Appeal held that the court's jurisdiction to appoint receivers by way of equitable execution under s37(1) was subject to the application of established principles to new situations, and thus incremental change. In other words, when the court was faced with novel situations and new circumstances it would adopt the same evolutionary and incremental approach to the jurisdiction to appoint receivers as it had done, and continues to do, when granting new forms of injunction. See paragraphs 136 to 184, per Lawrence Collins LJ. The Court of Appeal specifically rejected the judgment debtor's submission that the court's jurisdiction to appoint receivers was limited to those established categories where the courts of Chancery had appointed receivers before the fusing of law and equity under the Judicature Act 1873. On the facts in Masri, the Court of Appeal held that the English court had the power to appoint a receiver by way of equitable execution over certain future foreign debts due to the judgment debtor.
  • The powers of revocation were choses in action (or another species of intangible property) belonging to Mr Demirel, together with any future distributions of the trust assets by the trustee to Mr Demirel. Therefore the court could, and on the facts should, appoint receivers over the powers of revocation and over future distributions.

Chief Justice Smellie heard TMSF's application at first instance. In his judgment he accepted that the statutory power of the Grand Court to appoint receivers by way of equitable execution is substantially the same as in England, and that it should follow the incremental approach to the evolution of its jurisdiction to appoint receivers by way of equitable execution, as described in Masri. The Chief Justice was satisfied that the court's jurisdiction did extend to the appointment of receivers over any future distributions of the trust assets by the trustee to Mr Demirel. However, he declined to appoint receivers over the powers of revocation. He reasoned as follows:

  • The power to appoint a receiver by way of equitable execution is contained in s37(1) of the English Supreme Court Act 1981, which is incorporated into Cayman Islands law by s11(1) of the Grand Court Law. Thus the court may appoint receivers 'in all cases in which it appears to the court to be just and convenient to do so'.
  • It was well-established that where a judgment creditor could not levy execution at law because of the nature of the property, normally because the property was equitable, the court had discretionary jurisdiction to appoint a receiver, not to create a charge on the property, but to operate as an injunction to prevent the judgment debtor from receiving the income from the property or dealing with it to the prejudice of the judgment creditor. See Snell's Equity, 31st edition, at paragraph 17-25.
  • In Masri the English Court of Appeal had held that the jurisdiction to appoint receivers by way of equitable execution was not ossified, but permitted gradual and incremental improvement, and that the jurisdiction is not limited to choses in action that are available for legal execution. A court of equity must, however, be astute to recognise the boundaries of its own jurisdiction.
  • Masri was not authority for the proposition that a receiver could be appointed over a power of revocation in a trust, to bring about its revocation and the re-vesting of its assets in the settlor, where they have not themselves indicated an intention to do so.
  • The English Court of Appeal had held in Re Armstrong [1886] that a general power of appointment was not property in the context of the Married Women's Property Act 1882. The relevant provisions of the Cayman Married Women's Property Law (1997 revision) are in substantially the same terms. None of the subsequent English authorities were conclusive authority for the proposition that general powers of appointment or powers of revocation are tantamount to property, without specific statutory definition, including, for instance, s100 of its Bankruptcy Law.
  • An appointment of receivers over the powers of revocation so that the receivers may exercise them would be an impermissible delegation of the powers. See Re Triffitt 's Setlement [1958].
  • Construing a power of revocation of a trust to treat it as property of the holder tantamount to ownership of the trust assets for the purposes of permitting equitable execution would not involve the kind of incremental refinement and improvement of the equitable jurisdiction as was contemplated in Masri, but would involve setting aside the settled common law principles which have distinguished powers from the property they aff ect for hundreds of years. See Thorpe v Goodall [1811].

The Chief Justice held accordingly that he did not have the jurisdiction to appoint receivers by way of equitable execution over the powers of revocation. TMSF appealed.

Judgment of the Court of Appeal

In its judgment, the Court of Appeal dismissed TMSF's appeal but reached its conclusion by a different analysis from that of the Chief Justice. Vos JA, who gave the judgment of the court, agreed with the Chief Justice that the proper approach to the jurisdiction of the court to appoint receivers by way of equitable execution was the incremental refinement and improvement of the jurisdiction described in Masri. Thorpe v Goodall was clear authority that a general power of appointment exercisable in favour of the donee of that power was not a species of property that fell into the bankrupt's estate without express legislative authority, and that the court had no power to compel the judgment debtor to exercise the power in their own favour so the assets would vest in the then equivalent of their trustee in bankruptcy. Further, it was clear that the English legislature reversed the effect of Thorpe v Goodall by enacting s57 of the English Bankruptcy Act 1825, which became s44 of the English Bankruptcy Act 1883, which in turn was later incorporated in the Cayman Islands statutes as s100 of the Bankruptcy Law.

The Court of Appeal held that the Cayman Islands and English legislatures had clearly considered, in the law of bankruptcy and in other specific contexts, that clear legislative provisions were necessary for property to be treated as including general powers (of appointment or revocation) exercisable by their donees in their own favour. Vos JA concluded:

... the repeated enactments of the legislatures in these islands and the United Kingdom have... a greater significance. They show that it would be unwise and inappropriate for a court to allow equitable execution over a power of revocation by way of the kind of incremental advance envisaged by Lawrence Collins LJ's masterly judgment in Masri. This is not because it could not, in theory, be done. It is because, where legislatures have for almost 200 years taken it upon themselves to decide when powers should be considered to be included in some defined package of 'property', the court must assume that the legislature would not wish judges to arrogate to themselves that decision, in a situation where the legislature has not yet legislated, so as to include powers as a species of property for this purpose. As the Chief Justice held, the incremental advance in the availability of equitable execution to include powers should, in our judgment, and as a matter of policy, await express legislative intervention.

The Court of Appeal did not consider it necessary to decide whether or not at common law a power of revocation or a general power of appointment would constitute 'property'. Nevertheless, it did expressly dismiss TMSF's suggestion that the nature of a power of revocation is sufficiently different from a general power of appointment that for the purposes of TMSF's application the English cases treating general powers of appointment as distinct from property for the purposes of various English statutes were not applicable to powers of revocation. Vos JA observed that both species of power involve discretion in their exercise, but, even if they did not, the important point is that unless and until they are exercised the assets remain vested in the trustee. He observed that if it were necessary to decide the question whether or not at common law a power of revocation or a general power of appointment would constitute 'property', he would have thought that either powers of revocation and general powers of appointment were property or that neither were. Vos JA also thought it unnecessary to determine whether a power of revocation is a chose in action. He noted that although a power of revocation shared some similarities with a contractual option, it cannot be enforced by legal action until it is exercised, unlike an option.

Conclusion for trusts and estates practitioners

Although the Court of Appeal's decision ultimately turns on a question of Cayman Islands policy about where to draw the line between the incremental powers of the court to appoint receivers by way of equitable execution and the area of exclusive competence of the legislature, it seems likely that it will be followed in England and other jurisdictions that have similar legislative provisions and history. It should be noted that on 30 November 2009 the Court of Appeal (Sir John Chadwick P, Mottley JA and Forte JA) granted TMSF's application for leave to appeal to the Privy Council.

The answer to the question, posed in this article, of whether a creditor can enforce a judgment debt against trust assets via a power of revocation vested in the settlor is 'No, unless the creditor is content for the settlor to be bankrupted and therefore share in the proceeds pari passu with the settlor's other creditors'. The Cayman Islands courts have clearly decided that the rights of enforcement of judgment creditors of the settlor against the assets of the trust are limited to the well-established categories of shams, fraudulent dispositions, and the exercise of a power of revocation upon the bankruptcy of the settlor. The Tasarruf decision is therefore to be welcomed as confirming what trustees and practitioners had long considered to be established principles of law.

Re Al-Sabah

[2004-05] CILR 373

Re Armstrong

(1886) 17 QBD 521 (CA)

Masri v Consolidated

Contractors International SAL

[2009] 2 WLR 621

Smith Barney Private Trust Company

(Cayman) Ltd v Cebreros & ors

[2006] CILR 517

Re Triffitt's Settlement

[1958] Ch 852

Thorpe v Goodall

(1811) 17 Ves 388

Tasarruf Mevduati Sigarta Fonu

v Merrill Lynch Bank and Trust

Company (Cayman) Ltd & ors

[2008] CILR 267 (Grand Court)

(to be reported in a future edition

of Wills and Trusts Law Reports)

First published in Trusts and Estates Law and Tax Journal and has been reprinted with permission from them.

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.

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Martin Livingston
 
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