Privy Council hands down landmark decision on trustee liability and private international law

23 April 2018

Privy Council hands down landmark decision on trustee liability and private international law

The Privy Council has delivered its much anticipated judgment in Investec v Glenalla [2018] UKPC 7, the latest instalment in the long running dispute in relation to Robert Tchenguiz’s Jersey law discretionary trust (known as the TDT).

This decision is important because it determines the scope and effect of Article 32 of the Trusts (Jersey) Law, 1984, a statutory provision regulating the liability of trustees to third parties.

In August 2007 the interests of Robert Tchenguiz and his brother Vincent Tchenguiz, which had been held in a single trust structure, were separated into two different trust structures.  As part of that exercise, the shares in several companies were transferred to the then trustees of the TDT (Investec and Bayeux) and the trustees of the TDT also became liable for certain loans owed to those companies.  Although the TDT was governed by Jersey law, Investec and Bayeux were Guernsey companies and the TDT was administered in Guernsey.  Consequently, the loans owed by Investec and Glenalla to the companies in the TDT were not governed by Jersey law.

In December 2007, the TDT structure was refinanced and Kaupthing Bank obtained security over the companies to which Investec and Bayeux were indebted.  Following a default in the security arrangements, Kaupthing exercised its security over the companies in the TDT structure and appointed joint liquidators over those companies.  The joint liquidators demanded repayment of the loans owed by Investec and Bayeux to the companies in the structure.

In 2010 Investec and Bayeux commenced proceedings in Guernsey seeking a declaration that, pursuant to Article 32,  they were not personally liable to repay the loans owed to the companies over which the joint liquidators had been appointed.  The joint liquidators counterclaimed for repayment of the loans.

Robert Tchenguiz (as protector of the TDT) exercised his power to replace Investec and Bayeux with a new trustee shortly after the proceedings in Guernsey had been commenced.  The new trustee was joined to the proceedings and it argued that the joint liquidators were not entitled to enforce their claims against the TDT assets on the basis that the loan liabilities had not been reasonably incurred by Investec and Bayeux and that Investec and Bayeux had committed a grossly negligent breach of trust by failing to divest themselves of the liabilities after they had been incurred.

At common law, a trustee is personally liable for any transaction entered into as trustee, unless it contracts so as to limit its liability.  However, the trustee has a right of indemnity against trust assets for all liabilities which it reasonable incurs as trustee, although that right of indemnity does not arise if the liability was unreasonably incurred and the trustee’s right of indemnity may be restricted if it commits a breach of trust.  In certain circumstances a third party creditor of the trustee can enforce its claim directly against the trust assets by way of subrogation to the trustee’s right of indemnity but only if that right of indemnity is intact.

The Royal Court of Guernsey (Lieutenant Bailiff Sir John Chadwick) held that the liabilities owed by Investec and Bayeux had been reasonably incurred and that Investec and Bayeux were not liable for gross negligence for failing to divest themselves of those loan liabilities.  Those findings were upheld by the Guernsey Court of Appeal and by the Privy Council.  Accordingly, Investec and Bayeux have a right of indemnity against the assets of the TDT in respect of their liabilities to the companies over which the joint liquidators have been appointed.  However, the remaining assets of the TDT are insufficient to meet those liabilities in full.

The Board unanimously decided that the effect of Article 32 is to modify the common law by relieving a trustee of all personal liability for transactions entered into as trustee provided that the other party to the transaction knows that they are dealing with a trustee, although (overturning the Guernsey Court of Appeal) the Board held that Article 32 does not apply to costs orders made against trustees in the course of litigation.

The Board also decided unanimously that Article 32 does not give a third party creditor of the trustee any greater right to be paid out of the trust assets than it would have at common law.  If the liability incurred by the trustee was not reasonably incurred, or the trustee has otherwise committed a breach of trust preventing the trustee from exercising its right of indemnity, then a third party creditor will not be able to enforce its claim against the trust assets.  In those circumstances, where Article 32 applies, a third party creditor will have no ability to enforce its claims either against the trustee’s personal assets or against the trust assets.

By a majority the Privy Council decided that Article 32 applies so as to exclude the personal liability of a trustee even where the transaction giving rise to the claim is not governed by Jersey law and the claim is brought in a forum other than Jersey.  In doing so, the majority (Lord Sumption, Lord Carnwath, and Lord Hodge) held that the nature of the trustee’s liability was to be characterised for the purposes of private international law as a matter going to the “status” of the trustee under its constitutive law and therefore Jersey law was to be applied regardless of the law governing the transaction.  In a powerful and forcefully worded dissenting judgment, Lord Mance (supported by Lord Briggs) considered that the majority’s reasoning in this respect constitutes “a radical and unprincipled innovation, with potentially far-reaching consequences” and expressed the view that “the whole area will at some stage merit revisiting, because of its potential significance”.

This decision will have important practical consequences for persons transacting with trustees of trusts governed by Jersey law and those other jurisdictions where there is similar legislation (including Guernsey and the British Virgin Islands), whatever the law of the transaction.  Third party creditors will need to ensure that they have good security in respect of any transaction with the trustee of a Jersey trust, probably in the form of a personal guarantee from the principal beneficiaries of the trust.

Since the Board also held that Article 32 applies to at least some non-contractual liabilities (such as a claim under the law of unjust enrichment or a claim in negligent (or possibly even fraudulent) misrepresentation), persons who deal with Jersey trustees (especially banks and other financial institutions) will have to consider whether their present procedures for engaging in financial activities with Jersey trustees remain appropriate.

 

Daniel Warents and Matthew Watson (led by Ewan McQuater QC), instructed by Carey Olsen and Harcus Sinclair, appeared before the Privy Council for the joint liquidators.

Barristers