Jersey: Insolvent Trusts: A Further Development

Last Updated: 2 December 2015
Article by Nick Williams

Most Read Contributor in Jersey, September 2018

In our October update, we provided a briefing on the important decision in Representation of the Z Trusts [2015] JRC 196C which provided welcome guidance, and something of a warning, to trustees who find themselves administering trusts that are insolvent.  A link to this briefing can be found here.  The briefing concluded by noting that the Royal Court had yet to establish the appropriate insolvency regime for trusts and, in particular, whether it would appoint insolvency practitioners to undertake the asset realisation process.

Earlier this month, the Royal Court set out its position on these issues in Representation of the Z Trusts [2015] JRC 214.

Background

As a reminder, "Mrs C", the settlor, had established a series of Jersey trusts. Two of the trusts were "insolvent" - the Z II Trust and the Z III Trust - meaning that the trustees were unable to discharge liabilities as they fell due out of trust assets.

The Z II Trust had a number of creditors including the former trustees.  Their creditor claim was in relation to liabilities arising from litigation commenced against them by a third party regarding events connected with their former trusteeship.  There was a background of hostility between the former trustees and Mrs C.  The current trustees were also creditors in relation to their unpaid fees.

The Z III Trust had a number of creditors including, in particular, the Z II Trust for a substantial sum of money.  Thus, the respective solvency of the two trusts was interlinked, with the fate of the Z III Trust ultimately dependent on the fate of the Z II Trust.

Mrs C and her family (who are beneficiaries) had been pressing for new trustees to be appointed over the Z II Trust and the Z III Trust.  Earlier in the year, Mrs C exercised her power to give effect to this change.  That action was later set aside by the Royal Court for reasons explained in our previous briefing.  The extant issue, therefore, was what the appropriate regime for administration of the trusts should be.

The Parties' positions

The current trustees of the Z II Trust and the Z III Trust proposed a regime that was based on a regime previously utilised in a case involving an insolvent estate (and which was itself based on the désastre provisions that exist for insolvent companies and individuals).  This envisaged a process by which creditor claims would be examined and either admitted or rejected, and the orderly realisation of assets for the benefit of the creditors.

The current trustees indicated that they felt able to undertake the examination of creditor claims themselves, rather than delegating this task to an insolvency practitioner.  In this regard, they relied on the operation of Article 32 of the Trusts (Jersey) Law 1984 which states that, where a creditor knows that a trustee is acting as trustee, creditor claims will only extend to the trust property.  Thus, in their view, the Jersey position had been shorn of the potential personal exposure which would arise were there not to be such a limitation on liability, and which would create an inherent conflict.

The former trustees argued that the Royal Court, exercising its inherent supervisory jurisdiction, should appoint an insolvency practitioner to wind up the trusts.  This would have been commensurate with the approach in other insolvency scenarios, for example companies and individuals.  It said that different insolvency practitioners should be appointed for each trust, and, as officers of the Court, they should conduct an investigation into the circumstances in which the trusts had become insolvent.  This stance was resisted by Mrs C, who pointed amongst other things to the potential expense of such a step.

The Decision

The Royal Court held as follows:

  • in the case of an insolvent trust, the starting point for the Court is to supervise the administration of the trust in the interests of the creditors;
  • in the case of the Z II Trust and the Z III Trusts, the trustees technically had the power to appoint insolvency practitioners voluntarily to assist them in the administration of the trusts, and to delegate tasks to them.  Whether this would be the case in other trusts would depend on the terms of the relevant trust deed, and the circumstances of the trust and its creditors;
  • there is precedent for receivers being appointed by the Court over trusts, but it is a power that is exercised very rarely.  There is no obvious example of where it has been done in relation to insolvent trusts;
  • however, the Royal Court does in principle have the power to make such an order given the breadth of its inherent supervisory jurisdiction;
  • examples of where it may be appropriate to make such an order might be where there are lay trustees without the necessary skills to conduct an orderly winding up, or where the trustee found itself in a position of real conflict.  This is a non-exhaustive list;
  • however, where there was no unmanageable conflict then it may be more cost effective for the regime to be operated by the trustee under the supervision of the Court;
  • the Royal Court should retain a discretion as to the appropriate regime to implement, notwithstanding the decision in this (or any) case.  There was simply not a "one size fits all" solution for the issues arising from insolvent trusts.

In this case, the Royal Court saw little point in engaging a formal process of examining, admitting or rejecting claims in relation to the Z II Trust and the Z III Trust as, with the exception of the claim of the former trustee, all of the creditor claims were accepted.

In addition to the above, the Royal Court granted leave to the current trustees of the Z II Trust to retire and be replaced by the new trustees.  However, this was subject to a number of conditions including that the new trustees would preserve the creditor claim of the Z II Trust against the Z III Trust, would not themselves charge any fees or expenses (their charges were being paid by another individual who was not the settlor or a beneficiary) and that they would procure agreement of the other creditors not to demand repayment until the position of the former trustees had been clarified.

Comment

Although the Royal Court did not appoint an insolvency practitioner over the insolvent trusts in this instance, it clearly left the door open to the possibility that one could be appointed over other insolvent trusts in the future.  The recognition that there could be circumstances where such an appointment is justified is important.  In a corporate context, it is recognised in case law that liquidation is ordinarily the function of a liquidator, not that of a director.  It has also been held that a liquidator is in the advantageous position of being able independently and impartially to investigate the affairs of a company.  There are, therefore, compelling practical reasons why, by analogy, and in a different factual situation, the administration of an insolvent trust might be left to an insolvency expert.

A trustee is subject to the inherent jurisdiction of the Court, and the Court can supervise administration in times of difficulty.  Thus, trustees can be placed under its direction, which may provide comfort to creditors that their position is protected.  Ultimately, however, it is the interests of the creditors that are paramount in an insolvent trust, as this case again confirms.  A groundswell of creditor support for the appointment of an insolvency practitioner may be hard to resist, especially if that is the unanimous view of the creditor body.

There are also a number of residual questions regarding the approach of the Royal Court in insolvent trust situations.  For example, is the existing test in Beddoe applications appropriate, or does it need to be modified (or the threshold increased) given the lack of net funds in the trust, and the need to deploy any remaining assets and cash in a more careful way?  This sort of question may need to be addressed in future cases.

Ultimately, careful consideration should be given to whether statutory amendments to the Trusts (Jersey) Law 1984 (to provide further clarity in this difficult area) would be helpful to the trust industry in Jersey. The legislature saw fit to introduce limited liability under Article 32, which seemingly entrenches the insolvent trust conundrum (and arguably causes more problems than it solves), but has not subsequently introduced further amendments to assist the industry in dealing with it.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Walkers
Hatstone Lawyers
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Walkers
Hatstone Lawyers
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions