Cedar takes the view that a trust having as its sole motive the shielding of substantial assets from legitimate creditors is absolutely unacceptable. On the other hand, it should be possible to provide a reasonable level of security in relation to attacks by future unforeseeable. and reasonably unforeseeable creditors. In this context, the on-shore practitioner should consider whether the laws of his or her home jurisdiction offer satisfactory protection. If they do not, then it could well be advisable to adopt the laws of a country which offers enhanced security for the establishment, growth and protection of the trust fund. Not to do so may well amount to negligence, now that conscionable "asset protection" legislation is increasingly available in responsible jurisdictions. Indeed one can see eventual amendment onshore of uncertain or unduly harsh rules -relating to the voidable transfer of assets into trust. Else the quantum of liquid assets held offshore might well eventually assume staggering and even destabilising proportions.

Before Bermuda professionals made recommendations leading to legislation in the area of the validity of transfer of assets into Trust Funds, they had the enormous advantage of considering all so-called "Asset Protection" legislation enacted in various other offshore jurisdictions over the previous few years. They also had that period to observe the practical effect of such legislation insofar as genuine creditors might be adversely affected, and at the same time that success greeted the efforts of other domiciles' approach to asset protection. Such professionals had also seen the manner in which "Asset Protection" legislation has been marketed. Bermuda is a Blue Chip trust jurisdiction which will neither make available, or market, irresponsible asset protection schemes. While professionals in the trust field perceive the need to provide comfort in respect of future unknown creditors to persons establishing trusts for various planning reasons, Bermuda has not "bent the rules" in favour of debtors. The jurisdiction has ensured that legitimate creditors will be protected, ad thus only a first class trust clientele will be attracted.

Statute of Elizabeth - Fraudulent Transfers

The Statute 13 Elizabeth C.5 (the "Statute of Elizabeth") does not apply in Bermuda. However, would-be settlors of trusts should note the following "badges of fraud":-

  • the settlement into a trust or trusts of most or all the settlor's assets;
  • the settlor's continuing in possession of the assets, or continuing to enjoy their use or income;
  • secrecy or haste of disposition;
  • disposition made while litigation is pending; and
  • the settlor retaining an advantage under the settlement.
Settling a trust with the label "Asset Protection Trust" or "APT" may well constitute a further badge of fraud as might settling a trust in a jurisdiction with a professed public policy of protecting "international" trusts from creditors through the use of aggressive legislation.

Bermuda however, having chosen the path of moderation to maintain standards of commercial morality provides extra security for trusts without adversely affecting the jurisdiction's credibility.

The Legislation

Section 11(3), Trusts (Special Provisions) Act, 1989

"Where a trust is validly created under the law of Bermuda the Court shall not vary it or set it aside pursuant to the law of another jurisdiction in respect of:

(1) the personal and proprietary effects of marriage;

(2) succession rights, testate and intestate, especially the indefeasible shares of spouses and relatives;

(3) the protection of creditors in insolvency,

unless the law of Bermuda has corresponding laws or public policy rules."

The Conveyancing Amendment Act, 1994

Inserted a new Part IV A into The Conveyancing Act, 1983 ("The Principal Act"). The new Part operates to clarify and restrict (by addressing ,ho may be a creditor eligible to claim and by imposing certain time limits) the circumstances in which a transfer into a trust will be able to be set aside at the instance of a creditor.

Synopsis of Part IV A of the Principal Act Fraudulent Conveyance 1. A transfer of property into a trust or settlement made

(a) with the "requisite intention" i.e. with the dominant purpose of putting that property beyond the reach of a claimants

(b) at an undervalue (nil or insufficient consideration)'

2. is voidable at the suit of an eligible creditor viz., a person who

(i) at the time of, or within 2 years after a transfer, was owed, or became owed, a liability to pay a sum of money or to transfer property; or who

(ii) was owed a contingent liability at time of transfer and the contingency has fallen in; or who

(iii) on the date of proceedings to set aside transfer, was owed an obligation arising from a cause of action which accrued prior to, or within 2 years of the date of the transfer.

Notes:

1. to be determined on a balance of probabilities.

2. But a disposition shall not be set aside by reason only that it was made at an undervalue.

Time Limits referable in terms of para 2, (i), (ii) and (iii) above

Debt              As to 2 (i)  6 years from the later of the  
                               obligation becoming owed, or date of
                               transfer;

Contingent             2 (ii)  6 years from the date of the transfer. 
Liability

Claim                  2 (iii) 6 years from the later of the accrual 
                               of the cause of action or the date of 
                               transfer (minimum 8 years).

Trustee Protection under the Conveyancing Act

S36D

(a) Protects trustee for costs of defending trusts;

(b) Provides transfer will be set aside subject to costs and any pre-existing rights of Trustee or person through whom he claims;

(c) Provides that transfer will be set aside subject to any distributions already made.

Corporate Asset Protection Motivated by Political or Economic Uncertainty

Corporate clients are becoming increasingly interested in structures/strategies which assist diversification and security. They seek confidentiality, continuity of business interests, tax mitigation and a shield against possible expropriation of assets by acquisitive governments, predatory creditors, corporate raiders or business rivals. The strategic reorganisation of a Group's structure to add an "offshore" element may well achieve a degree of security when added to traditional risk management techniques and insurance. Arguably an holistic effect is thereby achieved.

Planners often wish to ensure that assets and the legal title thereof are, as far as possible, put beyond the grasp of, or "diplomatically" protected from governmental expropriation. Therefore, whether dealing with trust funds or company assets the emphasis is on offshore structures. Changing the basic nature of an asset or assets through cashing up or securitisation enables chattels, securities and cash readily to be moved abroad. Not so real property, shares in onshore corporations or businesses (although these may be used as security for loans diminishing available equity). For this reason, businesses have been looking to relocate offshore. Some companies are permitted under their existing legislative regime to migrate and continue abroad. Those unable to redomicile can usually achieve effective migration through a corporate reorganisation. Cedar and its associated legal advisors in Bermuda and Hong Kong can assist with planning and implementation in this area.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought for your specific circumstances.