Insolvent Trusts: Misnomer Or Reality?
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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 insolvency. 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 creditors: 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 administration 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 law trust were personally liable in HOW IS MODIFIED UNIVERSALISM 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 bankruptcy 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.