This interesting issue was raised and decided in the leading Jersey trust case RE ESTEEM SETTLEMENT (2003) Jersey Law Reports 188.

The ESTEEM case, followed a decision by the English Courts, relating to frauds committed by Sheikh Fahad, against the Spanish Company Gruppo Torras, which was owned by the Kuwait Investment Office ("KIO"). The assets which Sheikh Fahad had stolen from KIO, were transferred into a number of trusts of countries, including the Esteem Settlement Trust which were based in Jersey.

The Plaintiffs in the Jersey action, inter alia argued that the principle of "piercing the veil" should be applied to the Esteem Settlement trust, so that the assets of the trust, could be treated as those of the settlor, in order to allow recovery of debts by creditors. It was also argued that the principle should be applied to Esteem Ltd.

The principle of "piercing the veil", generally applies to corporations or company law, by which a Court could violate the legal separation between a corporation and the controlling natural persons, under circumstances, where the corporation was used to "conceal the true facts of impropriety".

The Plaintiff argued that as a logical development of the law, the principle of "piercing the veil" of corporations, should also be applied to trusts, to enable creditors to have access to assets settled on trust.

The Jersey Court held that the principle of "piercing the veil" could not be applied to a trust and therefore dismissed the Plaintiff's claim on this basis.

The Jersey Court, decided that the above principle, should not be extended to trusts, because of the fundamental differences, in the characteristics of companies, as opposed to trusts.

As separate legal entities, companies are separated from shareholders, generally for limiting the liability of the shareholders. The direct economic relationship, between the assets of the shareholders, and those of the company, secures that there is no prejudice and detriment to a third party, if the veil of the company, would be pierced.

On the other hand, the Court held that trusts are different from companies. Trusts are characterized by a separation of legal and beneficial proprietary rights.

The application of the principle of "piercing the veil" to trusts, has the potential, to deprive the beneficiaries of the beneficial interest, which they hold under the trust, and on such basis the court held that it could not find any reason or legal principle, to support an argument, that beneficiaries should be deprived of their beneficial interests.

COMMENTS

The legal principle laid down by Jersey Courts in RE ESTEEM SETTLEMENT, might of guidance to Cypriot Courts, because it is a good law. Cyprus as well as Jersey, are business centers, which have inter alia attracted, the establishment of a large number of international trusts.

The judgment in RE ESTEEM SETTLEMENT, correctly decided, that the nature of trusts and corporations, are so fundamentally different, that there is no legal basis to extend the principle of "piercing the veil" to 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.