This article focuses on the judgments delivered in June and October 2014 by the Guernsey Court of Appeal in the long-running Tchenguiz litigation [Investec Trust (Guernsey) Limited and Another v Glenalla Properties Limited and Others].

The decisions are of interest to insolvency practitioners because they clarify the meaning and effect of a legislative provision which limits trustees' liabilities and which is found in similar terms in both Jersey and Guernsey. This is also the first judicial guidance on the extent to which creditors' claims are affected by any duty the trustee has to make recompense to the beneficiaries of the trust in circumstances where the trustee is alleged to have been in breach of its duties to the beneficiaries.


Investec and one of its associated trust companies, Bayeux, were trustees of a Jersey law trust, the Tchenguiz Discretionary Trust (TDT), which was created by a declaration of trust in 2007. Investec and Bayeux (the Former Trustees) were replaced as trustees in 2010 by Rawlinson and Hunter Trustees SA (the Current Trustee). The other parties to the proceedings were four BVI companies: Glenalla Properties Limited (Glenalla), Thorson Investments Limited (Thorson), Eliza Limited (Eliza) and Oscatello Investments Limited (Oscatello), referred to collectively as the BVI Companies.


The principal beneficiary of the TDT was the high profile businessman, Mr Robert Tchenguiz. Along with his brother, Victor, Robert had been a beneficiary in the earlier family trust established by their father, the Tchenguiz Family Trust (TFT) of which Investec had also been the trustee. A decision was taken to split the trust assets, with Robert's interests being hived off into the TDT. In 2007 various transactions took place to give effect to this intention. During 2007 to 2008 the BVI Companies were held, directly or indirectly, as assets of either the TFT or latterly the TDT.

From 2007 onwards the TDT acquired a substantial and heavily-geared investment portfolio, the size and scale of which led to comparisons with a treasury clearing house. At its peak the TDT was believed to have borrowings of approximately £4 billion. During 2007 and 2008 the TDT borrowed approximately £183 million from the BVI Companies which in turn were financed by lending from Icelandic bank Kaupthing Bank hf (Kaupthing). The main borrowing involving the BVI Companies arose through two sets of transactions.

The first transaction was in August 2007 when, following the split between the TFT and the TDT, the Former Trustees agreed a novation of two debts owed by the TFT, being firstly the monies the TFT owed to Kaupthing under a loan agreement and secondly monies owed by the TFT to two of the BVI Companies, Glenalla and Thorson. The second transaction was in December 2007 when the Former Trustees were party to a refinancing of the TDT, pursuant to a framework agreement and overdraft arrangements. Pursuant to this refinancing, among other things the Former Trustees became liable for monies paid by either Eliza or Oscatello towards the discharge of the August 2007 loan agreement mentioned above.

The manner in which these two sets of transactions were (or were not) entered into the relevant accounting records of the TDT, the BVI Companies and the Former Trustees themselves, became one of the key issues in the case at first instance, as the Court was asked to determine the meaning and effect of these arrangements.

In any event, as 2007 progressed into 2008 the TDT became increasingly dependent on third party funding to stay afloat; Kaupthing increased the TDT's overdraft facilities to a total of £600 million. The crunch came in early October 2008 when Kaupthing collapsed. This brought an end to any new credit facilities and led to the appointment of receivers and liquidators of the BVI Companies. In April 2010 the BVI Companies' Joint Liquidators wrote to the Former Trustees demanding repayment of the sums due under the various arrangements, amounting to approximately £183 million.


The Former Trustees asked the Royal Court in Guernsey to grant them declaratory relief regarding the nature and effect of the arrangements they and the BVI Companies had entered into. Specifically, the Former Trustees argued that they should have no personal liability to the BVI Companies under the various transactions. They argued that they should be liable only as trustees, so that the BVI Companies' claims only applied to the assets held by the TDT. This analysis rested on one of the statutory provisions contained in the governing law of the trust, Jersey law, namely Article 32(1)(a) of the Trusts (Jersey) Law 1984 (as amended). If correct, this meant that the BVI Companies could only enforce their claims to the extent of the TDT assets.

The Former Trustees also argued that, notwithstanding their removal as trustee, they still had a valid right of indemnity against the TDT assets, which allowed them to (a) retain those assets vested in them, (b) realise the assets of the TDT in order to meet any liability they may be found to have to the BVI companies and (c) exonerate themselves from any such liability directly from the assets of the TDT.

The BVI Companies argued that they were entitled to judgment because the monies were due under the loan agreements, which were valid. They also argued that the Former Trustees were personally liable for the loans and they were therefore entitled to be subrogated to the Former Trustees' rights over the assets of the TDT.

Finally, the Current Trustee sought declarations that the BVI Companies had no right to payment and that the Former Trustees had no entitlement to an indemnity from the assets of the TDT assets. The basis of their argument was that the Former Trustees had acted unreasonably in creating the liabilities in the first place and subsequently by failing to extinguish the liabilities or to properly give effect to the intended transactions in their accounting records.


At first instance, by its judgment of December 2013 the Royal Court found in favour of the BVI Companies and gave judgment in the sum of £183 million plus interest and costs. The Court also found that Article 32 did not apply on the basis that the claims before the Guernsey court were for enforcement and, as such, did not fall within the Court's jurisdiction under the relevant provision of the Guernsey trust law. On that basis, the Former Trustees were found personally liable to pay the sums sought by the BVI Companies. In order to facilitate that payment, the Former Trustees were allowed to retain and realise the TDT assets as remained vested in them. The Current Trustee's arguments that the Former Trustees should be deprived of their indemnity failed.


Appeals were filed by both the Former Trustees and the Current Trustee, the former directed at the finding that Article 32 had not applied, and the latter directed at the finding that the Former Trustees had not acted in breach of trust and ancillary matters.

The first decision issued by the Court of Appeal was in June 2014 and concerned the question of whether or not Article 32 applied. The Court below had concluded that Article 32 did not apply, having regard to a conflict of laws issue arising out of the Guernsey trust law provision which deals with enforcement. The Court of Appeal held that this was wrong and that Article 32 did apply.

In October 2014, the Court of Appeal moved on to consider the meaning and effect of Article 32, now that it had been found to apply. Article 32 provides:

"32 Trustee's liability to third parties

(1) Where a trustee is party to any transaction or matter affecting the trust –

(a) if the other party knows that the trustee is acting as trustee, any claim by the other party shall be against the trustee as trustee and shall extend only to the trust property;

(b) if the other party does not know that the trustee is acting as trustee, any claim by the other party may be made against the trustee personally (though, without prejudice to his or her personal liability, the trustee shall have a right of recourse to the trust property by way of indemnity).

(2) Paragraph (1) shall not affect any liability the trustee may have for breach of trust."

It was common ground between the parties that the relevant part was Article 32(1)(a) because the BVI Companies "knew" that they were dealing with a trustee when entering into the loans. The Court of Appeal concluded that, where a trustee is a party to a contract to which Article 32(1)(a) (the contracting trustee) applies then:

  1. the contracting trustee is liable because it is the contracting trustee which is party to the contract and assumes the contractual obligations in its own name (reflecting the fact that a trust is a relationship rather than a separate legal entity). However, the contracting trustee is not required to satisfy a third party's claim from its personal assets;
  2. even if the contracting trustee has been removed as trustee, it can recover from its successor such trust property as is required to satisfy the claim;
  3. once the contracting trustee has paid over as much as is required of the trust property in satisfying the liability to the third party, the contracting trustee has no further liability to the third party; and
  4. the contracting trustee can satisfy the liability out of the trust property irrespective of whether or not there is any allegation of breach of trust, whether justified or otherwise, against the contracting trustee.

In short, once the contracting trustee has satisfied any liability up to the amount of the trust assets, the contracting trustee has no further liability in respect of his personal assets. It should be noted that the provision is only engaged where a third party "knows that the trustee is acting as trustee". The state of knowledge of the third party is a matter of fact to be determined in each case at the time the transaction is entered into.

There is no obligation on the third party to ascertain the capacity of the trustee to enter into a particular transaction but clearly it is advisable to do so. This would also offer an opportunity to seek additional precautionary steps to protect the creditor's interests e.g. in the form of security or undertakings concerning the management of the trust fund until payment is made. This reflects the risk now facing creditors who knowingly transact with a trustee - the creditor must accept that in due course any claim he makes will be met only to the extent there are trust assets available when the claim falls to be satisfied. However, those assets will include not only the assets that the contracting trustee has retained (which is almost invariably the case where the trustee's lien is exercised) and those passed over to a successor trustee. This right of recourse against trust property held by both the contracting and the successor trustee was characterised by the Court of Appeal as being an equitable right in the form of, or, analogous to a non-possessory lien. Further, although the creditor has no direct right against those trust assets, the creditor may nonetheless be entitled to a right of subrogation in respect of the contracting trustee's right of indemnity. Importantly, the Court of Appeal also found that the obligations to creditors were unaffected by any claim that may lie against the contracting trustee for breach of trust or negligence.

Interestingly, from a creditor's perspective, the Court of Appeal said that there was no scope for a contracting trustee to be personally liable to creditors where the trust fund is diminished through 'regular administration' of the trust. The inference to be drawn from this is that, if the trustee's management or administration of the trust property can be characterised as other than 'regular', the protection afforded to trustee of avoiding personal liability may be lost. However, further judicial consideration of this aspect is required.

The Court of Appeal is scheduled to sit in February 2015 to consider the remaining aspects of this appeal. In view of the novelty of some of these issues, appeals to the Privy Council are a distinct possibility.

In the meantime, any insolvency practitioner encountering a situation where a trustee has engaged liabilities should consider the ramifications of the above with a bid to securing the maximum return to the insolvent estate.

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.