Following a two-week trial in February 2023, Edwin Johnson J has handed down judgment in Adams & Ors v FS Capital Ltd & Ors  EWHC 1649 (Ch). The Judge upheld the claimants’ challenge to a trustee’s sale of loan assets with a book value of over £410m (“the Loan Assets”) as being for an improper purpose, and determined that the recipient was not a bona fide purchaser for value of those assets and was both liable to restore the assets to the trusts and personally liable as a knowing recipient.
The c.700 claimants were beneficiaries of one or more of three Jersey-law discretionary trusts (“the Trusts”) which formed part of Employer-Financed Retirement Benefit Schemes. They were also debtors in respect of the Loan Assets which had been settled on the Trusts as part of loan schemes, and which were subsequently impacted by the Loan Charge.
The Second Defendant, a Swiss Trust Company, was appointed trustee of the Trusts in January 2018 to assist with the implementation of a scheme which would provide finance to participants in the loan schemes which would avoid or mitigate the Loan Charge. After the scheme failed to gain traction with the beneficiaries, the First Defendant was incorporated as an SPV in order to purchase the Loan Assets. Shortly prior to the sale, the Second Defendant retired as trustee in favour of a PTC (controlled by the same individual as the Second Defendant). The disposal of the Loan Assets from the trustee to the First Defendant took place (primarily) in October 2019.
The book value of the Loan Assets sold was over £410m. However, the consideration payable by the First Defendant was just £33,000 of initial consideration for each trust, and a potential further sum capped at £392,011.31 in respect of each trust, to be payable from sums recovered from the debtor-beneficiaries by the First Defendant. This capped sum was deliberately selected by the trustee to correspond only with the alleged liabilities owing to trust creditors, and not to exceed that sum so that there would be no surplus received by the trustee to be held for the benefit of the beneficiaries, and the trusts would terminate for want of assets. The trustee never sought to obtain a market valuation of the Loan Assets. The only trust creditors were (i) the Second Defendant (as trustee); and (ii) a Jersey law firm at which the director of the trustee was also a partner.
The Claimants contended that the disposal of the Loan Assets by the trustee was for an improper purpose and therefore void, the transaction being designed to leave the beneficiaries with nothing and terminate the trusts in a way which would solely benefit the First Defendant, the Second Defendant and the Jersey law firm. The Claimants also contended that, to the extent relevant, the First and Second Defendants had personal liability (in knowing receipt and for breach of trust).
The Defendants contended that because each of the Trusts was cash-flow insolvent, the trustee was entitled to exercise its powers only in the interests of the trust creditors, and to exclude the interests of the beneficiaries, such that the power was not exercised for an improper purpose. They also contended that the First Defendant was a bona fide purchase for value without notice, and that the consequence of any improper purpose was that the disposal was voidable rather than void, and ought not to be set-aside. The First Defendant sought to bring a counterclaim in respect of the Loan Assets relevant to the Claimants in the sum of just over £120m.
In finding for the Claimants on the central issues in the case, the court reached the following important conclusions:
- As was consistent with the Supreme Court’s decision in BTI 2014 LLC v Sequana SA  UKSC 25, there is no absolute rule as a matter of Jersey law (as may have been suggested by the decision in Z Trusts  JRC 196C) that once there is an insolvency or probable insolvency of a trust, the trustee can only exercise its powers in the interests of creditors. Rather, a trustee may need to also take into account the residuary interests that the beneficiaries may have in the trust assets. The extent to which that is so will be a fact-sensitive question in each case.
- The purposes for which the disposal was effected were (i) to terminate the Trusts, (ii) to benefit the First Defendant by assignment of the Loan Assets to the First Defendant, free of the obligations of the Trusts, for a consideration limited by the cap, (iii) to benefit the Second Defendant and the Jersey law firm by paying off the sums calculated as being due to them, and (iv) to ensure that the consideration payable on the disposal would leave no surplus for the benefit of the beneficiaries.
- In circumstances in which the Trusts were cash-flow insolvent, but held assets of illiquid but potentially substantial value, the interests of the beneficiaries could not simply be disregarded or excluded in favour of the creditors. The disposal was therefore for an improper purpose.
- Article 55(1) of the Trusts (Jersey) Law 1984 qualifies Article 54(3), such that where a person deals with a trustee (including receiving trust property from them) that person is protected from claims of a beneficiary provided that they are a bona fide purchaser for value with actual notice of a breach of trust. This is the case in respect of proprietary claims as well as personal claims.
- Actual notice, as a matter of Jersey Law, comprises Baden categories (i) – (iii).
- The First Defendant had actual notice of the breach of trust and as such could not avail itself of the protection under Art. 55 of the Trusts (Jersey) Law.
- As a matter of English law, Cloutte v Storey is binding authority to the effect that a transaction which is entered into for an improper purpose is void. A Jersey Court would likely follow Cloutte and therefore the position is the same under Jersey law. The disposal of the Loan Assets was therefore void.
- Whilst the Second Defendant retired as trustee for regulatory reasons, it retired in favour of the PTC (in respect of two of the Trusts) with the intention that the planned disposal should proceed and therefore to facilitate that disposal. That rendered the Second Defendant liable for the breach of trust which followed in respect of those trusts (in addition to its liability as the trustee of the third trust).
As a result of these (and other) conclusions, the claim succeeded, and the counterclaim was dismissed.
A copy of the judgment can be found here.
Hugh Miall and James Fennemore were instructed by Morgan Rose Solicitors. Hugh and James each enjoy thriving commercial chancery practices, encompassing commercial disputes, civil fraud, insolvency and company law, and trusts litigation. Their domestic practices are regularly supplemented with work connected to and in other jurisdictions.