Cayman Islands: Trustees & Commercial Transactions: Why the BVI Is A Trust Jurisdiction Of Choice

The introduction of ATED in the UK has led to more trustees of family trusts holding UK residential real estate directly, rather than via an underlying company, creating additional risks and complications for both creditors and trustees. 

A BVI trust provides commercial certainty via a unique legislative framework which gives protection to both parties, allowing commercial transactions to proceed speedily and cost effectively. 

The Problem 

As every law student learns in their first Equity and Trusts lecture, a trust is not a legal person.  A trustee contracts as principal in its capacity as trustee and is personally liable on that contract. 

Of course, as the same law student will also have learnt, the trustee has a right to be indemnified from the trust fund in respect of those liabilities, provided – and this is the heart of the problem – that the trustee has acted properly in accordance with the terms of the trust in incurring them.  In practice, the creditor will be more interested in satisfying any claim from the trust assets and may be relieved to learn that it has a right of subrogation to the trustee's right. 

So far, so good.  But as subrogation is a derivative right – the creditor is substituted for the trustee with regard to the claim - it can be no greater than the trustee's right.  As a result, it creates a number of significant risks for creditors because the right of indemnity depends on the trustee having acted properly.  If it has not, the creditor must fall back on suing the trustee personally.  That is not much help if the trustee does not have the funds to meet the claim, nor if the contract contains a provision limiting the trustee's liability to its right of reimbursement from the trust fund.  It is true that the creditor might, with the aid of the same law student - now a capable trust lawyer - negotiate those provisions so that the trustee gives appropriate personal warranties and indemnities.  In our experience, however, those kinds of provisions are not often included and in any event, suing the trustee personally in what will almost certainly be contested proceedings is not an attractive option. 

The Risks for Creditors 

Which takes us back to the trustee's right of indemnity from the trust fund and the creditor's right of subrogation to it.  The trustee's liability may have been improperly incurred for any one of three reasons: 

(1) Lack of capacity.  The Trustee may not have had the power to enter into the agreement.  

(2) Lack of due authorisation.  The relevant power may not have been exercised in accordance with a procedure internal to the trust (such as obtaining the consent of a protector).

(3) Breach of equitable duties.  The power may have been exercised in breach of the trustee's duties, either in relation to their powers of investment or ancillary powers (such as a power of delegation or to supervise agents or a failure to take into account relevant considerations and ignore irrelevant ones). 

All three areas (and particularly the third) will require detailed investigation to ascertain whether the trustee has properly incurred the relevant liabilities.  Those investigations will be time-consuming and expensive, and the depth of the required enquiries may not find favour with the trustees or the beneficiaries.

None of this is conducive to certainty in commercial transactions. 

But that is not all.  There are two additional risks for trustees unrelated to the transaction itself, which makes things even worse for the unsuspecting creditor: 

(4) Unconnected Indebtedness of the trustee to the trust.  For example, the trustees may have committed a breach of trust in relation to some other transaction which may have occurred either before or after the relevant agreement.  It is impossible to eliminate this problem entirely.

(5) Change of trustees.  If a new trustee is appointed, the creditor's rights against the new trustee will be derivative rights exercisable via the old trustee's right of indemnity against the new trustee, which may itself be reduced or extinguished if the new trustee is indebted to the trust for any reason. 

There are two further risks for third parties receiving property from trustees: 

(6) Proprietary remedy for breach of trust.  Beneficiaries can assert their beneficial interest in trust property which has been applied in breach of trust (or property representing it) against third parties, via the processes of following and tracing. 

A third party in receipt of trust property paid in breach of trust has a defence if it can show that it is a 'bona fide purchaser for value without notice'.  But what is 'notice' for these purposes?  Unfortunately, it is not entirely clear how far the doctrine of 'constructive notice' – being deemed to have notice of those matters which would have been ascertained if reasonable enquiries had been made - applies in this context.  So the nature and extent of enquiries which a third party must make is uncertain.  One approach is to ask whether there is a recognised practice of making enquiries in transactions of the kind in question, but our experience is that widely differing approaches are taken where trusts are involved, so even if this is the correct way forward, it does not necessarily assist a great deal.

(7)    Knowing receipt.   Beneficiaries also have personal remedies against third parties who receive for their own benefit trust property transferred in breach of trust, provided there is the sufficient degree of knowledge on the part of the third party.  The degree of knowledge required is not settled, but similar principles are likely to apply as in the case of the proprietary remedy. 

Where the trustee incorporates an underlying company and that company enters into the transactions instead of the trustee, as is traditionally the case with most family trusts, those issues are much less acute, although any ancillary obligations entered into by the trustee (such as a guarantee of a loan taken out by the underlying company) will be subject to the same rules.  But there are circumstances in which this is not possible or advisable – unit trusts established for the Japanese market, for example - and ATED is now providing another incentive for trustees to dispense with the underlying company in certain circumstances. 

The BVI Solution 

BVI trust law provides a unique solution to these problems.  Part X ("Part X") of the BVI Trustee Act (as amended) (the "Trustee Act") contains a number of provisions which address these issues providing a much greater degree of certainty and protection, both for trustees entering into commercial transactions and the third parties who contract with them. Part X applies to all BVI trusts created on or after 1 March 2004. 

Limiting and Excluding the Trustee's Personal Liability 

There are two key provisions designed to protect trustees.  They only apply if the trustee has acted properly in the exercise of its powers in entering into the contract.5

Limitation of Personal Liability 

Firstly, where the trustee discloses its fiduciary capacity (or the third party is otherwise aware of it) the trustee is personally liable only to the extent of the value of the trust fund when the payment falls due. For these purposes, the trust fund is treated as including any property which has been distributed since the contract was entered into, subject to any contrary provision in the contract.7

Exclusion of Trustee's Personal Liability Entirely 

The second provision only applies if the trust expressly provides for it. If it does, the trustee is not personally liable at all under any contract with a third party properly entered into by the trustee in the trustee's fiduciary capacity, if the trustee disclosed that it was acting in a fiduciary capacity or the third party was otherwise aware of it. 

But what if the contract is not governed by BVI law?  Might there be a risk that the courts in that jurisdiction will not give effect to the statutory limitations or exclusions of liability?  It is thought that the risk of that is small: the Guernsey Court of Appeal recently held that the trustee's liability to a third party in contract should be governed by the law of the trust but other jurisdictions may conceivably take a different view, so an express provision in the contract may be advisable to avoid this potential problem. 

Protection of Third Parties Dealing with Trustees 

Direct Recourse to the Trust Fund 

If the trust so provides,10  the third party has direct rights against the trust fund, not by way of subrogation to the trustee's rights.  The third party's rights are asserted against the trustee in its fiduciary capacity.11

Clarifying and Limiting the Extent of Third Party Investigations Required 

Part X clarifies and limits the enquiries the third party needs to make.12  It does so by deeming a contract to be properly entered into by the trustee if it appears to the third party, after reasonable enquiry, that:

(a) the trustee has power to enter into a transaction of the kind in question; and

(b) if there are any requirements for the exercise of that power, the trustee has complied with them. (the "Deeming Provisions")

Importantly, it goes on to state that 'reasonable enquiry' does not extend to enquiry as to whether the exercise of the power would be in breach of any duty of the trustee, apart from any duty to comply with any requirements for its exercise.  So the test should be a fairly easy one to satisfy in practice.  There is no need to ensure that the trustee is not in breach of any duty in entering into the contract, so the third party can negotiate in the usual commercial manner without worrying about its having to keep an eye out for the trustee breaching its own duties. 

Indebtedness of the Trustee Disregarded 

Where a trustee has incurred a liability to a third party under a contract properly entered into13  by the trustee, the third party has a right of indemnity in respect of that liability against the trust fund and against distributed property or its traceable product, to which rights the third party shall be subrogated.14  In computing the amount of the indemnity, any indebtedness (unrelated or otherwise) of the trustee is disregarded.  If section 97 also applies,15  the third party has direct rights of recourse against the trust fund. 

In this way, the risks identified at 3 and 4 above are solved. 

Protection of Third Parties from Claims in Respect of Receipt of Trust Property 

Property acquired by a third party by virtue of a transaction is taken free and discharged from the trust and the creditor is not concerned to see the property acquired by the trustee from the third party if properly applied.16

Thus, provided the third party carries out the basic due diligence outlined above, it will be a bona fide purchaser for value without notice and no beneficiary will be able to assert a claim for knowing receipt or a proprietary remedy even if the assets were transferred in breach of trust, thus neatly addressing risks 6 and 7 above. 

Additional Powers to Protect Creditors 

Part X also permits additional powers to protect creditors to be conferred on trustees of a BVI trust.17  These only apply where the terms of the trust expressly so provide (but are routinely included in well-drafted BVI trust deeds).  Where they do apply, a trustee may, for the protection of a lender who lends money or assets to the trustee, restrict or impose conditions on the exercise of:

(a) powers of investment or other powers in the management or administration of trust property;

(b) rights of beneficiaries to actual receipt of trust property to which they have or may become entitled; and

(c) powers relating to the appointment, retirement or removal of trustees. 

This addresses the problems arising from future changes of trustees – risk number 5 above. 

It also allows creditors to be given additional comfort that the trustee will not be able to take actions which will prejudice the creditor's rights.  The creditor will have trust law remedies in respect of breaches, rather than relying solely on contractual remedies, which are, as we have seen from the above analysis, often unsatisfactory. 

Trustee Statutory Charge 

Another optional provision18  permits the trustee to grant security for contractual liabilities to a third party, including a "trustee statutory charge" which, unless agreed otherwise, has priority over:

(a) rights of persons under the trust;

(b) trustee's right of indemnity against the trust fund; and

(c) creditor's claims against the trust fund not secured by a fixed charge or right in the nature of a fixed security over any trust property. 

It is subject to any fixed charge or right in the nature of a fixed security over any trust property and subject to any trustee statutory charge entered into at an earlier time.


By the simple expedient of using a trust governed by BVI law,19  the trustee can exclude its personal liability (provided it has acted properly in the exercise of its powers) and a creditor (provided it carries out simple due diligence on the trustee's powers and requirements for their exercise) can have direct rights of recourse to the trust fund, without having to be concerned about any breach of trust by the trustee. 

This will promote much greater commercial certainty and should save everyone time and legal fees whenever trustees enter into commercial obligations directly.  As we expect to see more trustees enter any contractual obligations directly due to ATED, rather than using an underlying company to do so, we expect the use of BVI trusts to grow.


1. Annual Tax on Enveloped Dwellings – an annual tax on certain UK residential real estate held by companies and certain other entities and valued at over £2m (due to fall to £1m from 1 April 2015 and to £500,000 from 1 April 2016) on a sliding scale based on the market value of the property.

2. Snell's Equity (32nd ed., 2010) at 4-035; following the approach take in Macmillan v Bishopsgate (No 3). [1995] 1 WLR 978.

3. From the head-in-the-sand approach, that if we don't actually know, we don't have notice (a risky approach for a creditor given the likelihood that some form of constructive notice applies) to the (less common in practice) no-stone-unturned approach (less risky from a liability perspective, but more costly and time-consuming and in some cases, it may even carry the commercial risk that the client decides it's better to find another service provider who asks fewer questions!).

4. Many of the provisions contained in Part X were recommended by the Trust Law Committee in England in a 1998 Report entitled Rights of Creditors Against Trustees and Trust Funds, following an earlier consultation paper issued in April 1997 with the same title.  The recommendations have not been enacted in England.

5. The trustee must actually have acted properly: the Deeming Provisions (as to which, see below under the heading "Clarifying and Limiting the Extent of Third Party Investigations Required") do not apply to these.

6. s.98(2) Trustee Act.

7. s.98(3) Trustee Act.

8. s.97(1) Trustee Act.

9. Investec Trust (Guernsey) Limited et al v Glenalla Properties Limited et al, 27 June 2014, Guernsey Court of Appeal.

10. s.97(1) Trustee Act.

11. s.97(4) Trustee Act.

12. s.95 Trustee Act.

13. Or deemed to be properly entered into under the Deeming Provisions.

14. s.100(1) Trustee Act.

15. As to which, see under the heading 'Direct Recourse to the Trust Fund' above.

16. s.96 Trustee Act.

17. Section 101(1) Trustee Act.

18. Section 102(1) Trustee Act.

19. It is worth bearing in mind that the trustee and trust administration can be in any jurisdiction (other than for VISTA and non-charitable purpose trusts) so this is an option open to all.  For trusts not governed by BVI law, it is possible to change the governing law to that of the BVI, if it is permissible under the terms of the existing trust: s.81 Trustee Act.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Richard Grasby
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions