CREDITOR DENIED ENFORCEMENT REMEDIES AGAINST BENEFICIARY INTERESTS UNDER JERSEY TRUST
The Royal Court recently considered, for the first time, whether it was possible to issue an arrêt (a form of distraint) over the rights of a discretionary beneficiary under a Jersey trust.
The application arose against the backdrop of findings of fraud and contempt against an individual (the defendant) made by the Courts of England and Wales. Having obtained judgment against the defendant in England, the plaintiff attempted to enforce its terms but has had considerable difficulty in doing so. As part of this tortuous process, the plaintiff registered an English judgment in Jersey under the provisions of the Judgments (Reciprocal Enforcement) (Jersey) Law 1960 so as to attempt to enforce the judgment against the defendant's assets held in Jersey. The plaintiff had not been wholly successful in its enforcement endeavours and accordingly, in order to circumvent other costly potential remedies, sought an order for an arrêt over the defendant's interests as a discretionary beneficiary over three Jersey law trusts.
Under Jersey customary law, an arrêt is a distraint upon a debtor's movables in order to satisfy a debt. If so ordered, an arrêt creates a proprietary security interest in the movable property. While it is possible to create an arrêt over future property, that property must be capable of precise identification. There are no previous instances of a distraint being made upon the rights of a discretionary beneficiary. The Court thus considered the issues from first principles, as well as taking into account policy considerations.
As an initial step, the Court first had to determine whether a discretionary beneficiary's rights under a Jersey law trust could be capable of being classed as movable property so as to be subject to an arrêt, and if so, whether it was possible to obtain an arrêt over a discretionary interest (as movable property) so that the rights of that discretionary beneficiary might be transmitted to a creditor either by assignment or distraint.
In considering the first question, the Court held that a discretionary beneficiary's rights were deemed movable property. Indeed, Article 10 of the Jersey Trusts Law states expressly that an interest of a beneficiary, including a discretionary beneficiary, shall constitute movable property, and further that, subject to the terms of the trust, a beneficiary may sell, pledge, charge, transfer or otherwise deal with their interest in any manner.
Turning to the second question, the plaintiff submitted that it did not wish to prejudice the interests of the other beneficiaries, and would not put itself in a better position that the defendant as a discretionary beneficiary. After some discussion, it became clear that the plaintiff wished to be subrogated for the defendant as a beneficiary for so long as, and to the extent that, the debt remained unpaid. As part of that process of subrogation, the plaintiff would act as beneficiary, and seek copies of the trust accounts, a detailed asset and liability statements and copies of all supplemental instruments made affecting the constitution of the trust. In conclusion, the plaintiff conceded that the confirmation of the arret was but the first stage in the process. The second stage would place the Court in “unchartered territory” as regards how the defendant's rights as a discretionary beneficiary might be used by the plaintiff.
It is worth noting that the rights which were being discussed are fundamental trust rights, namely, the rights to due consideration; to compel due administration of the trust; to obtain information and accounts from the trustee; to bring claims for breach of trust; and to compel third party recipients of trust assets to restore them to the trustee.
In response, on behalf of the defendant, the most compelling argument was simply put: how can the rights of a discretionary beneficiary, which have no commercial value even if they are assignable, be of value to a third party? A trustee could not consider the plaintiff's interests when deciding whether or not to exercise its powers. Furthermore, if a distribution were to be made to the defendant's creditors, by way of a benefit to the defendant, the trustees already had that power without the need for an arret, albeit that circumstances when such a payment would be made against the express wishes of a beneficiary would be very limited.
The Court's starting point was that a trustee's discretionary powers were only to be exercised for the benefit of any of the beneficiaries, as defined in the trust instrument. If the trustee did otherwise, not only would the exercise be impeachable as a fraud on the power, but the trustee would be exposed to personal liability.
As such, the Court held that the rights of a beneficiary are personal and cannot be separable from that person and therefore cannot be exercisable independently of the discretionary beneficiary. Accordingly, the rights of a discretionary beneficiary are not transmissible. It was therefore not possible for the plaintiff to stand as a beneficiary so as to receive a payment from the trust funds. It was also not possible, on the terms of the trusts, for the plaintiff's interests to be taken into account when making a distribution.
In essence, the Court confirmed that a beneficial, discretionary interest which has not crystallised in the form of receipt of trust funds, could not be assigned to a creditor.
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.