Insolvent trusts: misnomer or reality?

Trustees of an insolvent trust will not, therefore, be personally liable for debts serlespeakISSUE NO.16 or claims exceeding the trust assets, provided that the statutory limitation applies. In England there is no statutory limit on trustees’ liability to the trust assets, I am delighted to introduce this but personal liability of trustees can be new edition of Serlespeak on topics limited contractually. in . I begin the edition by assessing how universalism in In Jersey, the Royal Court gave guidance on exercise of fiduciary powers in the cross-border insolvency has fared context of insolvent trusts in the Z Trusts since the decision of the Privy litigation. Importantly the focus shifts from Council in Singularis Holdings. the interests of the beneficiaries to the Matthew Morrison then considers “TO TALK OF AN interests of the : the changes brought about by INSOLVENT TRUST IS “…a trust that becomes insolvent should the Small Business Enterprise OF COURSE A MISNOMER” thereafter be administered on the basis and Employment Act 2015 to the (COMMISSIONER CLYDE- that it is insolvent, treating the creditors, directors’ disqualification regime. SMITH, Z TRUSTS [2015] rather than the beneficiaries, as the James Mather examines the recent JRC 031) persons with the economic interest in tendency of the courts to grant the trust.” ([2015] JRC 196C at [31]) freezing orders to claimants on It is, of course, not possible for a trust The authors of Lewin at 22-089 question the basis of future claims by an office-holder in a putative insolvency, (as opposed to its trustees) to become this approach: “we consider that the while Thomas Elias discusses the extent to which a charge over a insolvent since a trust is not a legal duties of the trustees remain owed to the lease may secure the goodwill of a business. Finally, Sophie Holcombe entity. Despite this, recent judgments of beneficiaries alone, even when the trust the Jersey and Guernsey Courts have explores recent decisions relating to the paradoxical concept of the is of doubtful solvency”. addressed the of insolvent insolvent trust. Lance Ashworth QC trusts, the exercise of fiduciary powers In Z Trusts the Commissioner considered in respect of insolvent trusts, and the that the test for an insolvent trust should liabilities of trustees of insolvent trusts. be on the cash-flow basis (at [28]). This practical guidance is difficult to reconcile In Guernsey, the Court of Appeal with the position that trusts cannot Cross-border insolvency considered whether trustees of a become insolvent. Jersey trust were personally liable in HOW IS FARING IN circumstances where the trust’s assets At a further hearing in October 2015 were insufficient to meet its liabilities, ([2015] JRC 214) the Court held that if a PRACTICE FOLLOWING SINGULARIS? and the trustees’ liability was limited by trust was insolvent, or likely to become statute to the extent of the trust assets insolvent “the starting point for the Court Cambridge Gas Transportation In Singularis, the Privy Council was (Investec Trust (Guernsey) Ltd v Glenalla is to supervise the administration of the Corporation v Official Committee of split 3-2 on the question whether the Properties Ltd [2014]). trust in the interests of the creditors as Unsecured Creditors of Navigator Bermuda court had a common law a body by way of directions given to the Holdings plc [2006] UKPC 26 is The Court of Appeal held that Article 32 power to assist office-holders of a incumbent trustee.” However, the court commonly regarded as the high of the Jersey Trusts Law limited trustee foreign court (Cayman), the majority “should be flexible in its approach”. watermark of “universalism” in liability to third parties to the extent of holding that it did. Lord Sumption, In England trustees could bring an insolvency proceedings. the trust assets available to satisfy the in the majority, provided the following application for directions under CPR trustee’s indemnity, provided the third This is the principle that insolvency guidance: Part 64. Distribution of assets from an party knew the trustees were contracting proceedings should move towards (a) It is only available to assist the insolvent traditional trust has not arisen as trustees. A former trustee’s right to a single law and a single jurisdiction officers of a foreign court of in the UK, but the English courts have be indemnified by the successor trustee covering all assets, so as to produce insolvency jurisdiction or equivalent given directions for distribution of assets was similarly limited to the trust assets, a result equivalent to that which would public officers. It is not available from statutory trusts (most recently: Re however the priority between former and be obtained if there were a single in a voluntary winding up which is Worldspreads Ltd [2015] EWHC 1719). current trustees’ indemnities where there universal jurisdiction. a private agreement; is a deficiency of trust assets is still to be It is yet to be seen whether the concept This, it is said, allows for a coherent (b) It is a power of assistance, existing answered (Z Trusts [2015] JRC 031 at [16]). of the insolvent trust will be adopted in procedural approach, and minimises for the purpose of enabling those other jurisdictions and whether legislation the inconvenience and costs The extent of the trust’s assets is to be courts to surmount the problems will be enacted to place administration of associated with ancillary proceedings. judged at the time the claim falls to be posed for a world-wide winding insolvent trusts on a statutory footing. satisfied, even if the trust assets have However, in November 2014, up of the company’s affairs by the been substantially reduced, provided in Singularis Holdings Ltd v territorial limits of each court’s that any reduction is a result of the regular SOPHIE HOLCOMBE is regularly PricewaterhouseCoopers [2014] UKPC powers. It is not available to enable administration of the trust. Article 32(1) instructed in relation to contentious 36, the Privy Council reconsidered the them to do something which they (a) applies even if the trustee is in breach domestic and offshore trust and limits on the powers of a court to assist could not do even under the law by of trust, but where the trustees have probate matters, including acting on foreign insolvency proceedings. which they were appointed; acted improperly they can expect a behalf of trustees of The Z II Trust in counterclaim from the beneficiaries. 2014 and 2015. CONTINUED CONTINUED

(c) It is available only when necessary in Guernsey. Concerned about the likely for the performance of the office- reaction of the bankrupt to the publicity holder’s functions; that would attach, the trustee decided not to seek a formal Letter of Request (d) It is subject to the limitation that from the English Court, which would such an order must be consistent have allowed the Royal Court to make with the substantive law and such an order. Rather she argued that public policy of the assisting court. the Royal Court had jurisdiction to grant Common law powers of this kind the trustee relief directly without any are not a permissible mode of such request. In a lengthy judgment, obtaining material for use in actual which is very illuminating on the history or anticipated litigation; of Guernsey insolvency legislation, the (e) Its exercise is conditional on the Lieutenant Bailiff considered various applicant being able to pay the ways in which the court might have third party’s reasonable costs such a power to assist the trustee by of compliance. making such an order. Had she been untrammelled by authority, she would In May 2015 the High Court of New have found that there was no common Zealand had to consider modified law power i.e. an inherent jurisdiction universalism (or as the Judge there, to treat a power conferred only by a Heath J, put it “universalist” principles) statute “as being available in a case in Batty v Reeves [2015] BCC 568. which is not within the statute relying The issue for the New Zealand court on some combination of usefulness, was whether it had jurisdiction to a generous assessment of analogy and grant certain assistance to a trustee in resort to a supposed beneficial principle bankruptcy in proceedings commenced of “modified universalism” of insolvency in England, which bankruptcy had law, of definite and necessarily been recognised in New Zealand. The presupposed extent”. Even if she judge considered whether the residual were constrained to follow the majority powers conferred by section 8 of the view of the Privy Council in Singularis, (New Zealand) Insolvency (Cross- she said that she would refuse relief border) Act 2006 permitted him to make on the grounds, first, that the absence the order. He distinguished Singularis of such an inherent jurisdiction had on the grounds that the issue in that already been established in local law, case was the breadth of the common and that no such inherent jurisdiction in law, noting that the Privy Council had support of the “modified universalism” specifically acknowledged that such of bankruptcy procedures applied, assistance could be given “within but also that any such inherent the limits of the receiving court’s own jurisdiction would be available only statutory” powers. He was satisfied that when it was “necessary” for the the grant of assistance on “universalist” performance of the officeholders’ principles can be exercised when a functions, and it was not; powers to statute expressly permits that course. obtain the compulsory provision of The New Zealand statute expressly information were available under the authorised the court to make an order Letters of Request procedure. that it could make if the issue had arisen The Small Business, in New Zealand. Therefore, it was open Accordingly, despite the majority view to him to make the order sought and he of the Privy Council in Singularis that Enterprise and did so. a common law power of assistance exists, other jurisdictions may not be By contrast in In the matter of X Employment Act 2015: as willing to recognise it in practice. (a bankrupt) (6th July 2015), the Royal Rather, a much better bet is to seek Court of Guernsey refused to make what lies beneath? assistance by way of a formal Letter an order granting assistance. The of Request where available and to rely trustee of X had her appointment as WHILE SLIGHTLY LESS OPAQUE THAN SOME COYLY on statutory powers in the jurisdiction X’s trustee recognised by the Royal NAMED STATUTES, THOSE PRACTISING IN THE FIELD in which assistance is sought. While Court along with her rights to collect modified universalism exists, it is OF INSOLVENCY MIGHT BE FORGIVEN FOR NOT funds and assets of his in Guernsey. proving difficult to apply in practice. IMMEDIATELY RECOGNIZING THE EXTENT TO WHICH She also sought an order “to examine any person(s) connected to and/or THE SMALL BUSINESS, ENTERPRISE AND EMPLOYMENT involved in the conduct of the affairs of LANCE ASHWORTH QC has an ACT 2015 (‘SBEEA 2015’) WILL AFFECT THEM. the Bankrupt, including an examination extensive English and offshore of any person(s) connected to and/or insolvency practice. These include clarifying that shadow office-holders to assign rights arising involved in the management or control directors are to be subject to the general in connection with wrongful and of” two companies, which were resident directors’ duties stipulated by sections , preferences and 170 to 177 of the Companies Act 2006 transactions at an undervalue. However, (‘CA 2006’), conferring the ability on the most extensive changes of note are administrators to bring fraudulent and those augmenting the disqualification claims and permitting regime under the Company Directors CONTINUED

Disqualification Act 1986 (‘CDDA 1986’). These amendments have been in force Anti-avoidance and since 1 October 2015. A number of the changes to the CDDA freezing injunctions 1986 regime are concerned with its international ambit. It has long been INSOLVENCY PROCEDURES HAVE LONG PLAYED AN established that directors of companies IMPORTANT ROLE IN THE RECOVERY OF ASSETS IN incorporated under the Companies CIRCUMSTANCES WHERE A JUDGMENT HAS BEEN Act 1985, and latterly the CA 2006, are liable to disqualification irrespective OBTAINED BUT CANNOT READILY BE ENFORCED. of nationality, domicile or the country There is a growing tendency, however, in which the actions demonstrating for claimants to point to the steps that an unfitness took place (seeRe Seagull insolvency office holder could take on Manufacturing Co Ltd (in ) the defendant’s putative insolvency after No.2 [1993] Ch 91). to ensure that those operating with the benefit of limited liability within the United judgment as a basis for freezing assets at In addition, disqualification orders Kingdom are not free to escape liability the outset of a claim. have been held to be available against by offshoring their misdeeds. A commonly encountered scenario is those who have been directors or that the defendant’s assets are held in shadow directors of foreign incorporated Further steps towards the avowed offshore company or trust structures, companies that are wound up pursuant purpose of strengthening the CDDA or have been transferred to a spouse to the provisions of the Insolvency Act 1986 regime “to give the business or family members, in circumstances 1986 (‘IA 1986’) (see Re Eurostem community and consumers confidence leading to a suspicion that the assets are Maritime [1987] PCC 190). that wrongdoers will be barred as directors” include providing for the in reality the defendant’s own or under disqualification of persons in accordance his control. Insofar as the defendant in Increased with whose directions or influence a fact beneficially owns them, they will be disqualified director acts, even if such caught by the standard form freezing Since the assets caught by a freezing account is also persons do not satisfy the requirements order. To establish that this is so, however, injunction are in principle confined to of shadow directorship (section 105, will generally require the claimant to argue to be taken of those amenable to future enforcement, it SBEEA 2015; new CDDA, section 8ZA). that the arrangements are a sham (and victim impact the allegation often made that the assets might be thought objectionable to permit Increased account is also to be taken are held as the defendant’s nominee the freezing of an asset on the basis of at of victim impact, section 106, SBEEA itself usually amounts in substance to an least two contingencies, namely (i) that Section 104, SBEEA 2015 now 2015 stipulating that the schedule of allegation of sham). Because a shamming there may be a future insolvency, in which introduces a new section 5A, CDDA matters to be taken account of shall intent must be shown on the part of both (ii) the office holder may commence a 1986 permitting the Secretary of include the nature and extent of any the transferor and the transferee at the claim to recover the assets concerned. State to seek a disqualification order harm which has been occasioned, as time of the original transfer, that may not However, it was made plain in Revenue or accept an undertaking from a well as the frequency of misconduct. be an easy task. and Customs Commissioners v Egleton director convicted of an offence outside Indeed, section 110, SBEEA 2015 goes [2007] 1 All ER 606 that this is not so. Great Britain which equates to an so far as to provide that a new section By contrast, the mere timing of transfers, That case was concerned with the indictable offence under United Kingdom 15A, CDDA 1986 shall for the first time or absence of other potential sources making of a freezing order against a law in connection with the promotion, permit a compensation order to be made of wealth on the part of the transferee, third party under the Chabra jurisdiction, formation, management, liquidation against a director on the application of the may go a long way to establish a good rather than the defendant. Moreover, or striking off of a company, and the Secretary of State where a disqualified arguable case that transfers could later Briggs J observed that it should generally of a company’s property. director’s misconduct has caused an be unpicked by an office holder under be a or provisional liquidator, identifiable loss to a or creditors. one or more of the anti-avoidance rather than a petitioning creditor, who Further, section 106, SBEEA 2015 provisions of the Insolvency Act 1986. seeks the freezing relief. provides that the Court shall take Although buried within an In the case of transactions defrauding into account a person’s conduct as unprepossessingly named statute, creditors, a victim can bring a claim under In more recent decisions, however, it has a director of one or more overseas these extensions to the CDDA and the Insolvency Act whether or not the been treated as unexceptional that the companies when appraising unfitness other modifications summarized transferor is bankrupt or has been wound potential availability of Insolvency Act and determining the period of above warrant unearthing and up. In the case of provisions such as claims to a putative future office holder disqualification. Specific matters to careful consideration by those whose sections 238 and 239 of the Insolvency should justify the grant of freezing relief which the Court is required to have practices include consideration of Act, the claim must be brought by an to the claimant himself. As illustrated regard accordingly now include the extent directors’ liabilities in insolvency and office holder and therefore only after the by two recent as yet unreported cases, to which a director was responsible for disqualification. onset of insolvency. Bataillon v Shone (QB, 18 June 2015) and a foreign company’s contravention of Avonwick v Shlosberg (Ch, 6 November legislative or other requirements, the 2014), moreover, this may encompass MATTHEW MORRISON has a foreign company’s insolvency and the it should orders both against the transferor broad insolvency and company law nature and extent of any loss or harm defendant (who is suspected of still practice with a particular emphasis caused by such foreign company. generally be controlling the assets) and the transferee on shareholder claims and director third party (under the Chabra jurisdiction). Given the increasingly global manner in . He is a contributing a liquidator which the affairs of modern companies editor of chapters on insolvency or provisional are conducted, including the extensive liabilities and disqualification to JAMES MATHER acted in both use of foreign subsidiaries for the Butterworths Corporate Law Service liquidator...who the Bataillon and Avonwick cases purposes of tax planning and the and The Law of Limited Liability seeks the and specialises in fraud, insolvency, facilitation of international trade, these Partnerships, Whittaker and Machell company and partnership disputes. developments are clearly necessary (4th edition, 2016). freezing relief Securing a share of goodwill WHAT VALUE IS SECURED BY A CHARGE OVER A LEASE OF COMMERCIAL PREMISES?

A recent ex tempore decision in the such as its right to use the Spar brand. Chambers Companies Court in Re Crosscastle (in The court held that 50% of the goodwill of liquidation) (unreported) held that even the business carried on at the premises though a lease may, on the face of it, adhered to the lease. news have negligible value, when it is sold in As to the valuation issue, it was common connection with a business, a portion of People ground that the value of the lease of partnership/LLP case of 2015. John the goodwill of the business carried on Machell QC led the seminar with the premises, if sold as an empty unit, We are delighted to welcome as at the premises may adhere to the lease. Jennifer Haywood and Tom Braithwaite. was nil or nominal. The only real value new tenants Richard Wilson QC and A charge over a lease may therefore Constance McDonnell, who join us was in the adherent goodwill. This was We hosted a successful property secure part of the goodwill of a business. from 3 Stone Buildings. We are also litigation seminar in Southampton in determined following cross-examination delighted to congratulate Andrew October. Our next London property law Crosscastle Ltd operated two “Spar” of the experts. Moran, Daniel Lightman, Richard seminar takes place in March. We return branded convenience stores in It is notable that, while the sale contract Wilson and Professor Jonathan Harris to Bristol in April for a roadshow which Battersea. Capper & Co. had loaned (honoris causa) on taking silk, and to for the business assigned a value to the will include seminars on commercial money to Crosscastle secured by two introduce our three pupils for 2015/16: and property law. Speakers will include goodwill, the court placed little weight charges over the lease of one of its Charlotte Beynon, Sophia Hurst and Christopher Stoner QC, Andrew on that valuation, it being common two premises. There was no mention Eleni Dinenis. Francis, Richard Walford, David Drake, ground between the experts that such Amy Proferes and Suzanne Rab. of goodwill in the charges. Directories and awards apportionment was usually done for the We will be hosting a full-day litigation In 2010, Crosscastle entered convenience of the buyer, and bore little The latest editions of the two major legal conference at the Merchant Taylor’s Hall directories have now been released. administration, and the whole business, relation to the real value. in September, which follows on from the including the leases of two premises, In Chambers & Partners, we are The decision shows that, even where a highly successful conference in 2014. stock, chattels, intellectual property recommended as a set in 10 practice lease has no apparent value, the security areas, and we have 109 individual We are also sponsoring a number and goodwill was sold. Crosscastle over such a lease may still be valuable. barrister recommendations, placing of forums and conferences this year subsequently went into liquidation. us in joint 7th place in the “sets with the including the C5 forum on Fraud, Asset This will, however, depend on the facts. highest proportion of barrister rankings” Tracing & Recovery (Geneva), the Legal The liquidator and Capper & Co. could While a significant proportion of the table. In the Legal 500 directory, we are Week Trust & Estates Litigation forum not agree the value of the charges goodwill of a business may adhere to the recommended as a set in 9 practice (Provence) and the IBC International and the liquidator applied for directions lease of a pub or convenience store, for areas and received an impressive Trusts & Private Client forum (Jersey). under section 112 of the Insolvency other types of business, such as those 120 individual recommendations. Books and publications Act 1986. There were two issues: operating principally or exclusively over We are described as “A quality set from (1) what proportion of the goodwill of the internet, it may be that no goodwill The 4th edition of The Law of Limited top to bottom” and “a tremendous the business attached to the lease; adheres to the business premises at all. chambers housing numerous leaders Liability Partnerships was published and (2) what was the value of the lease in their fields”. in January. In producing this new edition, John Whittaker and John plus any adherent goodwill. We have also been shortlisted for a Machell QC were assisted by a team In Chissum v Dewes (1828) 5 Russell number of awards: of contributors from Chambers: 29, the Master of the Rolls held that • We received 2 nominations for the Tom Braithwaite, Jennifer Haywood, the goodwill of a business could not Chambers & Partners Bar Awards: Matthew Morrison, James Mather, Christopher Stoner QC for Real Adil Mohamedbhai, Amy Proferes be separated from the lease of the Estate Silk of the year and Giles and Emma Hargreaves, as well as premises in which the business was Richardson for Chancery Junior specialist outside contributors. carried on. However, by the time of Muller of the year. Khawar Qureshi QC launches a Legal & Co’s Margarine v Commissioners of • As a set, we were nominated for Handbook series in March, consisting Inland Revenue [1901] AC 217, it was Chambers of the year for Private of 3 books: Public International Law understood that goodwill arose not just client: trusts and probate at the Before the English Courts, Conflict of from location, but also from other factors, Legal 500 UK Awards and Elizabeth Interest in Arbitration, and Investment including the name and reputation of the Jones QC was nominated for Silk Treaty Claims. person carrying on the business. of the year in the same area. LinkedIn Accordingly, in Crosscastle the court held • We were one of only 7 chambers We have 4 discussion groups on shortlisted for Chambers of the that the proportion of goodwill adhering LinkedIn to enable Serle Court Year at the British Legal Awards. to a lease was a question of fact. The members and clients to discuss topical business was a convenience store, with issues in Partnership and LLP Law, Conferences and seminars most customers coming from within a Fraud and Asset Tracing, Contentious An LLP seminar was held in September Trusts and Probate, and Competition small geographical area. However, there following the Flanagan v Liontrust Law; please join us. were no restrictive covenants preventing case, which was the first LLP case competitors establishing themselves in concerning the applicability of the close proximity. The business also had THOMAS ELIAS acted for doctrine repudiatory breach to LLP and Edited by JONATHAN FOWLES goodwill which arose from other factors, the liquidator. widely regarded as the most important

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