In an important judgment published last week, the Royal Court of
Jersey has provided guidance to trustees and other holders of
fiduciary powers in relation to the exercise of powers when a trust
is considered to be "insolvent". Counsel in the case was
unable to find any relevant authority on this subject in any other
trusts jurisdiction, so this may well be one of the first cases to
deal with this issue.
Whilst noting that to talk about a trust being insolvent, as
such, is strictly a misnomer, since a trust is not a separate
legal entity and cannot as a matter of law be insolvent, the
Court noted that it was a useful shorthand, and provided its
guidance accordingly. The case concerned the purported
exercise by the settlor of a trust of a power to appoint
additional trustees. The trust had a number of creditors, including
the settlor herself, and others including some connected to
settlor's family or to other trusts established for the
family. Unconnected creditors were current and
former trustees. The court used the word "creditor"
in the sense that claims were being asserted against the
trust, although such claims had not been admitted in any
formal insolvency process.
The court confirmed the principles to be applied in relation to
the exercise of fiduciary powers, including the circumstances
in which a fraud on the power can arise, and reiterated the
observation of the court in the Jersey case of Re
Bird Charitable Trust that the various examples cited in that
case "are really all examples of the underlying principle
that a power [can] only be exercised for the purpose for which
it was conferred and in accordance with its
The court also confirmed that a fiduciary is under a duty to act
in the best interests of the person to whom the fiduciary
obligation is owed and in concluded that that "once there
is an insolvency or probably insolvency of a trust, the trustee and
all those holding fiduciary powers in relation to the trust
can only exercise those powers in the interests of the
This is an important point. Insolvency brings about a shift
towards the interests of the creditors, so that it is the
creditors as a class (and not a majority of them) rather than
the beneficiaries who have the economic interest in the
trust. As to the test for insolvency, the court confirmed that
in a case such as this, it is the cash-flow test that applies,
as for an individual or a company, i.e. that the trustee
is unable to meet its debts as trustee of the trust out of the
trust property, as they fall due.
The fact that the trust's assets may exceed its liabilities
on the balance sheet test is irrelevant as would normally be
the case with a deceased's estate, for example - creditors
cannot be expected to wait until the assets are realised.
The analysis may be different with a commercial or structured
trust arrangement where it is likely that a trustee will have
fewer discretionary powers and the interests of creditors will
likely be more prominent because of the commercial nature of
Having found that the power to appoint new trustees, held by the
settlor, like all other fiduciary powers in relation to the
trust, had to be exercised in the interests of the creditors
as a whole, the court considered that it had to ascertain
objectively the settlor's purpose and intention in
exercising it. Her own evidence showed that the purpose of
appointing the two new trustees was, through majority voting, to
enable her chosen trustees to take control of the trust, and
this in her interests and those of the beneficiaries and the
majority (connected) creditors. The appointments
were therefore not made in the interests of all of the
creditors of the trust and the fact that a majority of the
creditors consented to the appointment did not assist.
Accordingly the appointment of the additional trustees was set
In the context of a trust, the test for insolvency is the
Once there is an insolvency (or probable insolvency) of a
trust, the trustees and all those holding fiduciary powers
(protectors and the like) can only exercise their powers in
the interests of the creditors.
For that reason, a trustee of an insolvent trust would be wise
to exercise its powers either with the consent of all of the
creditors, or under the guidance of the Royal Court of
1  JLR1 at para 74.
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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