Legally, yes. However the Royal Court of Jersey has noted that
the phrase is useful shorthand for a situation that may have been
encountered by many trust practitioners.
In 'In the matter
of the representation of Volaw Trustee Limited in its capacity as
trustee of the Z II trust', the Royal Court considered the
appropriate test to determine whether a trust can be said to be
insolvent and the consequences if the answer to that question is
The Court confirmed that, in the context of a trust, the
cash-flow test (whether a debtor is able to meet its debts as they
fall due) was the correct test to apply.
Specifically, the test was confirmed as being whether a
trustee is unable to meet his, her or its debts – as trustee
– as they fall due, out of the trust property. To
this end, the Court drew strong comparisions between the insolvency
of a trust and the insolvency of a company or individual with
ongoing business activities.
Those parallels did not end there, though.
When a company becomes insolvent its directors' duties
should shift to focus on the interests of the company's
creditors. Significantly, the Court noted that a trust that
fails the cash-flow test, also, "should thereafter be
administered on the basis that it is insolvent, treating the
creditors, rather than the beneficiaries, as the persons with the
economic interest in the trust".
That is an enormously important fact for trustees to take into
consideration in the exercise of their fiduciary powers, and raises
a number of practical issues.
Most pressingly, the fact that in an insolvent trust situation
the trustees and others (such as protectors) who owe fiduciary
duties would have to exercise those duties for the benefit of the
creditors as a whole raises the prospect of direct claims from
creditors arising from a trustee's dealings with trust
So what can a trustee do when it thinks that a trust may be
Companies have a number of 'safe harbour' procedures to
deal with insolvency situations (administration or liquidation, for
example) but a trust, not being a legal entity, cannot take
advantage of these. Instead, a practical option would be for
trustees to make a Public Trustee v Cooper application to
invoke the Court's supervision, as the trustee of the Z
II trust did.
In that way, a trustee can try to limit their liability in the
face of uncertainty over whether they should continue to look to
the interests of beneficiaries, or whether that focus should shift
full-circle to creditors.
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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