Cayman Islands: Joint Official Liquidators Of Saad Investments Co Ltd Successfully Appeal Decision On The Possible Validity Of Common Law Trusts Over Property Situated In A Civil Law Jurisdiction

Last Updated: 31 December 2014
Article by Carlos de Serpa Pimentel

Akers (and others) v Samba Financial Group [2014) EWCA Civ 1516

BACKGROUND

Mr Al-Sanea, owner of certain shares in five Saudi Arabian companies (including the respondent Samba Financial Group (Samba)), purported to transfer the beneficial interest in those shares by six transactions (Transactions) which included declarations of trust in favour of Saad Investments Company Limited (Saad), the appellant company in liquidation. Saad had been incorporated in the Cayman Islands. Shortly before Saad was wound up, a disposition of the shares was made to Samba. The appellant joint official liquidators (JOLs) of Saad claimed that Saad had a proprietary interest in the shares, which was necessary for the declaration sought by the JOLs under section 127 of the Insolvency Act 1986 that the subsequent disposition of shares to Samba was void (with the JOLs valuing the shares at approximately USD 318 million at the relevant time, if the shares were beneficially owned by Saad, a disposition of the shares to Samba would have given Samba priority over other creditors of Saad to the extent of that value). Since the four later Transactions did not refer to any express choice of law, and the choice of law of the two earlier Transactions purported to be the laws of Bahrain/Saudi Arabia, which according to the Court's judgment do not recognise the concept of a trust or the division of legal and beneficial interests in shares, deciding whether or not these Transactions resulted in Saad obtaining a proprietary interest in the shares proved problematic. The Convention thus became relevant in determining the governing law. The trial judge held that Saudi Arabia was the forum conveniens, effectively ending any challenge to the validity of the disposition of the shares to Samba. The JOLs took the position it was arguable that the trusts in favour of Saad were governed by Cayman Islands law and therefore valid.

On appeal, substantial submissions were made on the interpretation of Article 4 of the Convention. The first question the Court had to determine was whether Article 4 applied to exclude the application of the Convention to the six Transactions. In a characteristically clear and thoughtful judgment, Lord Justice Vos distinguished between the capacity to alienate property (governed by lex situs under the common law conflicts rules) and the capacity to create the trust structure (governed by the law of the trust). The Court further distinguished between the capacity of a settlor to alienate property at all and the capacity of a settlor to alienate an interest in shares by way of declaration of trust. On this topic, it was held that as long as the property which is the subject of a trust can be alienated at all under the lex situs (in this case, Saudi Arabia), questions as to the validity and effect of placing such assets in trust, even though the assets are shares held in a civil law jurisdiction, can be determined by the governing law of the trust. In the context of the six Transactions, the declarations of trust would therefore not have divided the legal and equitable interests in the shares since that apparently would not be possible under Saudi Arabian law, but they might have given Saad rights under the trusts in respect of those shares that would have to be determined by the governing law of the trusts, taking into account that the division of equitable and legal interests is not possible under the lex situs. The Court held that these issues would be determined at the next stage of the litigation.

It was held that the declarations of trust in the later Transactions could not be described as acts by virtue of which assets are transferred to the trustee pursuant to Article 4, since the owner of the shares, Mr Al-Sanea, had already owned the shares and simply declared that he held them in a new capacity: beneficially for Saad. The Court found that the trial judge had addressed the wrong question: that it ought not to have been the broad question of whether English conflicts rules generally require the ownership of shares to be determined by the lex situs, but the more specific question of whether the alienation of the equitable interests in the shares under the declarations of trust in the Transactions was excluded from the provisions of the Convention by Article 4 (to which the Court's answer was that it was not for the reasons already stated).

In considering whether Article 15 meant that mandatory rules of Saudi Arabian law must be applied to the purported transfers of the beneficial interests in the shares under the declarations of trust, the Court held that the objective of Article 15(d) is that the law of the trust does not override the mandatory rules of the lex situs concerning transfers of title to property. In other words, the governing law of the trust under the provisions of the Convention could not exempt compliance with any legal formalities for the valid transfer of property situated in the country where such formalities are required. It was also determined on appeal that whether Article 15 applied, and in this case whether the supposed "mandatory rules" for the alienation of shares under Saudi Arabian laws were in fact mandatory, were not matters to be decided on a stay or summary judgment application as these questions required expert evidence on Saudi Arabian law and cross examination of expert witnesses in trial.

As to the issue of whether Articles 6 and 7 applied Saudi Arabian law and whether that issue ought to have been determined on a stay application, the Court found that while the trial judge rightly considered that disputed questions of Saudi Arabian law could not be determined on a stay application, Article 7 did not overwhelmingly support the conclusion that the governing law of each trust was that of Saudi Arabia/Bahrain. The Court held that it was at least arguable, with regard to Article 6, that it was implied by the terms of the declarations of the later Transactions that they were to be governed by Cayman Islands law, being a common law regime that would recognise the trusts. The matter had to be determined in light of the circumstances of the case and the limited factual evidence presented in the High Court was not sufficient to come to a definitive conclusion. A full evidential hearing of the background information with respect to the Transactions was necessary and since the background of the later Transactions was likely to be related to the background of the earlier Transactions, it would be undesirable to stay part of the proceedings on the grounds of forum non conveniens, even if it seemed likely that the two earlier Transactions were governed by Saudi Arabian law. It was also restated obiter that "the objects of the trust" as construed under Article 7 in ascertaining the law with which the trust is most closely connected, must also include the intention to benefit the beneficiaries.

As to the final issue of whether Article 5 disapplied the Convention so that the common law rules applied (resulting in Saudi Arabian law being the governing law), the Court agreed with the trial judge that this question also could not be decided on a stay application because of the need to hear further evidence on the background of the Transactions. Therefore, it is clear that the questions as to the application of Articles 15, 5, 6 and 7 could only be determined after a full evidential hearing in light of the circumstances of the case.

CONCLUSION

The main points to note from this judgment are the Court's finding that, on the assumption that the governing law of the trusts was Cayman Islands law, Article 4 did not exclude the application of the provisions of the Convention to the declarations of trust as the declarations themselves did not transfer anything to the trustee, specifically in the later Transactions where Mr Al-Sanea already owned the shares. Furthermore, even though the law of Saudi Arabia as the lex situs would govern Mr Al-Sanea's capacity to alienate the shares at all, Cayman Islands law would govern his capacity to alienate an interest in the shares by way of declaration of trust and the transfer of the beneficial interest effected by the declarations. This distinction will be important for lawyers in common law jurisdictions to keep in mind when creating such mixed trusts over property situated in civil law countries. Any decisions in the subsequent stages of this litigation may bring further clarity to the interpretation of the provisions of the Convention and certainty as to the governing law and validity of such trusts. Settlors of such trusts already in existence will likely be comforted by this decision as it appears to favour maintaining the validity of such trusts.

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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