Knowledge

Trust-busting

It is a common experience for commercial litigators to find that judgment debtors have placed their wealth in offshore discretionary trusts. Two recent Jersey decisions underline that, while traditional trust-busting is alive and well, any attempt to cut corners is unlikely to succeed.

In Kea Investments v Watson [2021] JRC 009, Kea had obtained a significant money judgment against Mr Watson in England and Wales based on fraud. Mr Watson is a discretionary beneficiary of a number of Jersey trusts (the "Trusts"), as are his children. Kea faced a choice – to pursue "expensive causes of action available to it in Jersey against the trusts, namely a proprietary claim and fact-intensive claims that at least some of the corporate assets within the trusts are in fact held on resulting trusts for Mr Watson" (the Prest v Petrodel approach recently successful in the English High Court in Cobussen Principal Investment Holdings v Akbar [2020] EWHC 2805 (QB)); or, alternatively, to take what the court described as a shortcut, and attempt to enforce its judgment debts against Mr Watson's discretionary beneficial interests in the trusts.

Kea accepted that Mr Watson had no right or entitlement to any part of the Trusts' property. Its case that it could enforce against his discretionary beneficial interest rested largely on the definitions in the Trusts (Jersey) Law 1984 (the "TJL"), which are clear that (i) the interest of a beneficiary constitutes movable property, and (ii) a beneficiary includes a discretionary beneficiary. Kea argued that if a discretionary interest was movable property, it could be enforced against – albeit Kea accepted that in doing so it could not get any better interest in the trust than Mr Watson had. Kea argued it would be able to request a distribution as if it were a beneficiary; the trustee would then be obliged to consider that request, accede or not, and its decision would ultimately be subject to challenge by Kea as a beneficiary (on the usual limited grounds).

Although the Royal Court accepted that the TJL defined a discretionary interest as movable property, it held that this was subject to the terms of the trusts in question. It found that on the (relatively standard) terms of the Trusts, a discretionary beneficiary had no power to assign or transmit their interest to a third party; and if they did so, any exercise of a discretionary power by the trustee in favour of that third party would necessarily be a fraud on a power, as it will have been exercised for an improper purpose (i.e. to benefit a non-beneficiary). The interests of a discretionary beneficiary are not by their nature transmissible. If Mr Watson's rights were somehow assigned to Kea by way of distraint, it could not use them in any practical way as it would not itself be a beneficiary.

By contrast, the decision in Re Arpettaz Settlement 2020 (2) JLR 119 confirms that traditional trust-busting is alive and kicking. This case involved ongoing English fraud proceedings against the settlor, including the key allegation that the assets of a Jersey trust were the proceeds of the settlor's fraud. The English claimants sought to join the trustee to the English proceedings. The trustee sought (and was ultimately granted) permission from the Jersey court to submit to the jurisdiction of the English court, to take a neutral position, and to disclose certain privileged advice.

Some Jersey commentators have expressed the view that, on the face of it, the approach of the trustee and the court in Arpettaz (in favour of submitting to the English court) undermines the firewall in the TJL, which would normally require that matters concerning Jersey trusts be decided under Jersey law. However, exceptions to the application of the firewall (Article 9(2A)(a) and (b) of the TJL) expressly preserve (inter alia) the application of foreign law when it comes to the question of whether a settlor actually owned property settled into trust, or had the power to settle it into trust. Given the English proceedings alleged that the settlor had misappropriated the assets settled into trust, the decision of the English court on this question, applying English law, would (on this point at least) be capable of enforcement by the Jersey courts. On the face of it, the trustee's decision to submit made sense. In a later judgment, it was confirmed that the trustee had signed up (in principle) to a settlement agreement which involved a payment of unknown quantum from the trust.

Accordingly, traditional trust-busting approaches continue to succeed (including, in addition to those identified above, "Pauline actions" based on the allegation that the trust was settled with the intention of putting assets beyond the reach of creditors), and when the right approach is available it continues to be possible to bring trustees to the negotiating table at an early stage.

Enforcement generally

Jersey operates effectively as a modern, creditor-friendly jurisdiction when it comes to enforcement generally. It was formally confirmed in a judgment for the first time in Representation of Roberts [2021] JRC 008 that the Royal Court can appoint enforcement receivers in aid of enforcement of a judgment, but the receivers in this case were in fact appointed in 2017 and, in our view, it was never in question (even before 2017) that this was a weapon in the armoury of the Royal Court. The Royal Court has had the jurisdiction to grant freestanding freezing injunctions in aid of foreign proceedings since 1996 (Solvalub v Match Investments 1996/161 and 1996/238) and, while the imminent decision of the Privy Council on appeal from the BVI in Convoy v Broad Idea is awaited with some interest, we consider that the Jersey legal system is sufficiently different to continue to plough its own furrow regardless of the result. The Royal Court also adopts an expansive approach to discovery in support of freezing injunctions, Norwich Pharmacals, and its own Jersey-specific enforcement tools such as saisies judiciaires and arrêt entre mains.

Authors - Robert Christie, Partner and Sonia Shah, Senior Associate, Jersey.

This article first appeared in the ThoughtLeaders4 Disputes magazine issue 1, June 2021.