As a matter of Jersey law, where a trustee retires or is removed it is entitled to be provided with reasonable security for liabilities before surrendering the trust property. As there is no statutory lien under Jersey law the provision of a contractual indemnity to an outgoing trustee as security for its proper liabilities is standard practice. This article will look at what level of indemnity is generally acceptable in negotiations between an outgoing and incoming trustee and will consider recent developments in the Royal Court of Jersey in relation to the concept of a non-possessory lien.
Why is an indemnity necessary?
Where a trustee retires or otherwise relinquishes control over the assets of a trust, it faces the prospect of continuing personal exposure to liabilities arising in connection with the trust without direct access to the assets from which it would previously have been able to reimburse itself.
The Trusts (Jersey) Law 1984 (the Law) provides that a trustee who resigns, retires or is removed from their office and has surrendered the trust property is automatically released from any liability to a beneficiary, trustee or other interested person. However, this wording does not cover liabilities to third parties.
In this respect, the Law provides that where a trustee retires or is removed it must surrender the trust property in its possession or under its control subject to being provided with reasonable security for liabilities whether existing, future, contingent or otherwise, but is silent on what amounts to reasonable security.
The logical starting point is that the outgoing trustee should remain entitled to the same level of protection by way of reimbursement that it had while it was in control of the trust assets. As there is no statutory lien under Jersey law enabling a former trustee to access the trust assets under the control of the current trustee it has therefore become standard practice in Jersey for an outgoing trustee to seek express contractual covenants for indemnity from the incoming trustee in respect of its contingent liabilities.
Negotiation of indemnities
In order to reduce the time and related costs spent in negotiation of such indemnities STEP have published jurisdiction specific guidelines and a template form of indemnity which aim to achieve a balance between providing the outgoing trustee with reasonable security and reducing the complications of negotiations on the change of trustee. However, the STEP template is only a guideline and can be deviated from if justifiable in a particular situation. In each case the outgoing trustee should assess how much protection it actually requires in light of (amongst other factors) the nature and the amount of the liabilities which are likely to arise, the nature and risks associated with the trust assets and the activity undertaken by the outgoing trustee.
It is clear that an indemnity should only extend to the proper liabilities of the outgoing trustee to which it would have been entitled to reimbursement from the trust fund had it remained trustee of the trust and should not extend to liabilities for breach of trust arising from fraud, wilful misconduct or gross negligence on the part of the outgoing trustee. In addition, the liability of the incoming trustee is usually limited to the value of the capital of the trust fund held by the incoming trustee from time to time and the amount of distributions of trust capital by the incoming trustee to beneficiaries or successor trustees who do not themselves enter into similar covenants with the outgoing trustee, known as "chain indemnities".
Following an amendment to the Law in 2012 it is now possible as a matter of Jersey law to enter into a chain indemnity in favour of a former trustee (rather than a direct indemnity to which the former trustee is party) provided that the indemnity is expressed to be for the benefit of the former trustee or expressly provides that the former trustee may enforce such indemnity. Notwithstanding the change in Jersey law, an outgoing trustee may still wish to insist upon a chain indemnity to which it is party to ensure that it can enforce such indemnity against a successor trustee or beneficiary resident in a jurisdiction other than Jersey.
It is common for the outgoing and incoming trustees to agree limitations on any such chain indemnity, in particular that the incoming trustee is only under an obligation to obtain a chain indemnity in favour of the outgoing trustee on a change of trusteeship or when any distributions of the capital of the trust fund in that accounting year exceeds in aggregate 10% of the capital of trust fund and that the requirement to obtain such indemnity only lasts for ten years. If the incoming trustee does not obtain a chain indemnity for the outgoing trustee then it may be personally liable for the value of the distribution if there is a claim under the indemnity. This is because an outgoing trustee will rarely be exposed to permanent uncapped risk and will rarely need to have an indemnity that it unlimited in time or quantum. The reason for the limitations of ten years and 10% is a concession that a retiring trustee will rarely be exposed to permanent uncapped risk and will rarely need to have an indemnity that it unlimited in time or quantum and is also to reduce the administrative burden on the outgoing and incoming trustees so that it is not necessary to enter into numerous deeds of indemnity for small amounts, even though this does reduce the protection which the outgoing trustee receives.
An overall time limit of 10 years in respect of the chain indemnity is generally acceptable because under the law of Jersey a claim in tort would normally prescribe after 3 years, a claim under a contract after 10 years and most tax claims are barred six years after the end of the tax year to which they relate.
Does Jersey recognise the concept of a lien?
Unlike the English position (as we understand it), Jersey does not have a clearly developed concept of a lien and until the recent decision of the Jersey Royal Court In the matter of the Z Trusts JRC031 it was unclear whether a non-possessory lien existed in Jersey.
The Royal Court in Z Trusts confirmed the Guernsey Court of Appeal decision in Investec Trust (Guernsey) Limited v Glenalla Properties Limited and Others  that under Jersey law a former trustee's rights of indemnity give them an equitable interest in the trust property (separate from any contractual right) which extends to the liabilities for which a former trustee would have been entitled to reimbursement out of the trust fund if it had remained trustee akin to a non-possessor lien. The Royal Court stated that a former trustee is entitled to ensure that the current trustee does not take steps which will "destroy, diminish or jeopardise" that right. The Royal Court also observed that a trustee's equitable right takes priority over the claims of the beneficiaries but stated that the issue of priority over other creditors was not so straight-forward as there are no creditors in law of a trust; the liabilities are those of the current and former trustees. In particular, in the case of a deficiency of trust assets, where the current and former trustees all have equitable rights in respect of the liabilities, costs and expenses they have incurred, is it the case that that the former trustee would have priority for its liabilities over the current trustee?
As the scope of a former trustee's equitable interest under Jersey law is yet to be fully determined by the Royal Court it is likely that the practice in seeking contractual indemnities will continue for the foreseeable future.
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.